Steve Waygood, Aviva Investors | 16 October 2015
Last month, 150 world leaders gathered at the United Nations to set 17 new Sustainable Development Goals (SDGs) with some 169 targets, from ending hunger to providing water and sanitation for all. With an estimated cost of around $22 trillion attached to achieving these ambitious goals, we cannot expect governments and civil society alone to meet the challenge. It will need capital markets and global investors to play their part.
The good news is that momentum for sustainable investment is at a tipping point. Over 1,300 investors managing almost a quarter of world assets (around $60 trillion) have committed to the UN-supported Principles for Responsible Investment (PRI), and the global sustainable investment market is growing at around 9% annually.
However there remains a failure by a majority of investors to turn these aspirations into action. Last month for example, the PRI reported that only 43% of its signatories integrate ESG into the fundamental analysis of company valuations in equities.
So what is holding them back?
The corporate disclosure gap
The biggest barrier preventing investors from really incorporating environmental, social or governance (ESG) factors into their investment decisions is the inaccessibility of consistent data such as carbon emissions, employee turnover or resource use.
This is a major gap. For example, how can an investor be expected to reduce its exposure to water risk when most large companies in most sectors do not report their water usage, or do so using different standards and methodologies?
Building a bridge to cross this gap is one of the most important next steps if we are to harness capital markets to help deliver the SDGs.
Stock exchanges must build the bridge
Investors do have access to some ESG data in some markets. Voluntary reporting regimes mean that nearly 2,000 companies report climate change information to the CDP (Carbon Disclosure Project) and over 8,000 organisations (companies and others) have reports published on the Global Reporting Initiative (GRI) database. However these items are not consistent or global enough to meet investor needs–they are merely foundation stones that need a more coherent overlay to bring it all together and bridge the divide to mainstream investment practices.
And when it comes to global financial architecture, the only ones who can deliver the standardized ESG data which investors require, are stock exchanges and their regulators.
Stock exchanges have a unique role in capital markets, as it their listing requirements and guidance that ensure companies file data that is material, meaningful and comparable with their peers. Stock exchanges and their regulators ensure that when an investor analyses a traditional financial indicator, such as a profit and loss statement, they can trust that it’s been calculated in similar ways whether that company is in Boston, Beijing or Berlin.
We need them to be required to do the same for sustainability indicators.
There is a real business case driving investor support for this move because ESG risks are real, material risks to be managed. So without standardised information, investors face uncertain risks and are prevented from making smarter, long-term investment decisions.
But it is also in the long-term commercial interests of stock exchanges themselves to act. That is because in a rapidly changing world, where stock exchanges are coming under increasing pressure, the companies that choose to list with them do not want to be associated with markets that are constantly suffering ESG scandals and blowouts. Ensuring a high standard of sustainability reporting from their member companies helps stock exchanges to protect their brand.
That’s why a 2012 survey of major exchanges found that 76% of stock exchanges agreed that they have a duty to encourage better corporate disclosure on sustainability, and more than a third agreed these measures should be mandatory.
To stop the tragedy of the commons, we need IOSCO
In recent years, we have seen some individual stock exchanges show real leadership on corporate ESG disclosure. The Johannesburg Stock Exchange and the Australian Securities Exchange – among others – have included ESG disclosure as a listing requirement, and this summer, bourses in Hong Kong, Singapore and Malaysia proposed the same. In the U.S., Nasdaq has responded to great work by U.S non-profit Ceres and helped launch a sustainability working group within the World Federation of Exchanges to further pursue consensus by exchanges on voluntary reporting measures.
In general however, the problem is a classic tragedy of the commons.
That’s because unless most exchanges in most jurisdictions all move at once, there is opportunity for companies to game the system by moving their business to a different exchange. It also creates confusion for companies who list in multiple jurisdictions. Thus most big exchanges only want to move if everyone else moves at the same time. Leading to inertia.
The body that is best-placed strategically to overcome this inertia is IOSCO – the International Organization of Securities Commissions – which is the influential global hub for all securities regulators.
Most people have not heard of IOSCO, but it is an important and well-respected body which investors have seen act with prudence and foresight on issues such as cyber-crime, where IOSCO coordinated effective stock exchange and market action.
However, on the issue of closing the corporate ESG disclosure gap, IOSCO has yet to make a move.
Last October, a US$9 trillion coalition of over 100 investors, spearheaded by Ceres, sent a joint letter to IOSCO Secretary-General David Wright and IOSCO’s 34-member board, asking for leadership to drive this effort forward. A year on that letter remains unanswered and I hope David Wright and IOSCO’s board respond before a change of leadership in 2016.
In that time, we’ve seen the Council of the European Union release rules for non-financial reporting, the roll-out of the ‘Investor Listing Standards Proposal’ document from Ceres, and the UN produce its ‘Model Guidance on Reporting ESG Information to Investors’- all of which are valuable tools to catalyse stronger disclosure measures from stock exchanges across the world.
Crossing the chasm
We must bridge the corporate disclosure gap if we are to get capital markets to help deliver the new SDGs. The raw materials are there but the bridge requires a more comprehensive and consistent global approach to sustainability data and only stock exchanges and their regulators, co-ordinated by IOSCO, are strategically placed to put it all together.
As we celebrate the new SDGs and take our first steps to achieve them, I hope that IOSCO and its stakeholders are willing to play their part.
*Steve Waygood is Chief Responsible Investment Office of Aviva Investors.
 Sustainable Stock Exchanges, A Report on Progress – Responsible Research