Increasing focus from financial institutions on corporate responsibility is reflected in how stock exchanges are approaching environmental, social and governance issues

Stock exchanges have tightened their rules regarding socially responsible investment and sustainability reporting by listed companies. A new report from the World Federation of Exchanges (WFE) – Exchanges and Sustainable Investment – outlines initiatives taken by some of its 51 member exchanges “designed to raise issuing companies’ awareness and/or to promote or require better transparency and disclosure on ESG-related performance and risk factors”.

A number of these examples come from exchanges in developing economies. Bursa Malaysia began publishing CR guidance for companies as early as September 2006. China’s stock exchanges have encouraged companies to publish annual sustainability reports. For example, the Shenzen Stock Exchange began issuing CR guidance for listed companies in 2006, and the Shanghai Stock Exchange introducing similar measures in 2008.

Also in Asia-Pacific, the Australian Securities Exchange and the Taiwan Stock Exchange have both included provisions regarding corporate responsibility in their codes for several years.

Sustainability indices

As well as introducing stipulations regarding social reporting, possibly the most prominent contribution stock exchanges are making to raising the profile of corporate social responsibility has been the establishment of specialised markets for socially responsible investors.

According to the WFE report, the number of sustainability indices offered directly or indirectly by WFE members has risen from fewer than five in 2000 to 51 in 2009. Among these are the FTSE4Good series, the Nasdaq OMX GES Sustainability Nordic Index, the Wiener Börse VÖNIX Sustainability Index and Johannesburg Stock Exchange Socially Responsible Investment Index.

Increasingly, however, there has been a trend towards sector-specific indices focusing on companies that provide solutions to particular sustainability challenges, such as clean technology, sustainable energy and environmental services.

Dr Steve Waygood, head of engagement and SRI at Aviva Investors, believes the WFE report shows that in general exchanges are “moving the agenda forward”. He says there should be greater emphasis on sustainability within the principal exchanges, rather than just on specialist indices, to allow investors “to compare globally on a like-for-like basis”.

“Indices are a step in the right direction but it is important for the main exchange to promote good practice and maintain the integrity of the exchange in general,” Waygood says. He would like to see a requirement for companies to produce a sustainability strategy – or explain why they do not think that it is necessary for them to do so – and put that report or explanation to a vote at their AGM.

Dr Craig Mackenzie, senior lecturer in sustainable enterprise at the University of Edinburgh, believes the increased activity by stock exchanges is helping to legitimise corporate responsibility and could encourage companies, but he remains cautious. “It’s a soft gentle breeze in favour of sustainability rather than a sharp instrument of non-government regulation,” he says.

However, Mackenzie welcomes that exchanges believe they can enhance their credibility by having strong policies on environmental, social and governance criteria. That said, he feels that the competition between exchanges ultimately limits their ability to take tough steps against companies on corporate social responsibility grounds. He argues that exchanges would be reluctant to de-list a company on a corporate social responsibility issue.

But the increased attention paid by stock exchanges to corporate social responsibility reflects changing priorities among senior executives of major financial institutions and asset managers. And this is despite the fact that some equity analysts remain cynical about corporate responsibility from an investment standpoint.

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