(A version of this article originally appeared in Responsible Investor)
With respect to corporate sustainability reporting, we have left the era of laissez faire, but we have not quite entered the modern age. A new report by the nonprofit sustainability organization Ceres gives us reason for optimism about the near future state of our capital markets.
Investors Have Their Say on Sustainability & Stock Exchanges: Feedback on the WFE ESG (Environmental, Social and Governance) Guidance and Recommendations provides feedback from more than 30 investors on formal guidance issued by the World Federation of Exchanges to help listed companies disclose information to their investors on their sustainability performance.
The fact that the WFE guidance, released in 2015, exists at all represents a major step forward for corporate accountability. A 2008 Domini Impact Investments report found only two stock exchanges that had issued any form of guidance on ESG disclosure: the Johannesburg Stock Exchange and the Bursa Malaysia.
Today, largely thanks to the efforts of the Sustainable Stock Exchanges (SSE) initiative, 40 stock exchanges around the world have issued ESG guidance or have committed to do so in the future. Twelve stock exchanges maintain listing standards requiring some form of sustainability disclosure from listed companies. However, there is much more progress to be made.
The Ceres report comes on the heels of the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures recommendations, triggered by G20 chairman Mark Carney’s historic “Breaking the Tragedy of the Horizon” speech in 2015. In that speech, Carney warned that climate change presents a serious threat to global financial stability and pointed to the significant gap between financial timeframes and natural processes already underway. In other words, he warned, “once climate change becomes a defining issue for financial stability, it may already be too late.”
Global stock exchanges have an important role to play in mitigating the climate threats we face. But first, we need to address a key question that has been holding back progress for too long: Do investors care? Do they want this information? The Ceres report helps to set the record straight on where investors stand on this question.
First, it is now quite clear that investors care. The Sustainable Stock Exchange Investor Working Group represents more than $7 trillion in assets under management. Last year, the Securities and Exchange Commission’s request for comments on revisions to its disclosure rules produced an outpouring of letters from the institutional investor community seeking mandatory sustainability data. This is not what apathy looks like.
Not only do investors care, Ceres’ report reflects a consensus about the general parameters of what they want. For example, investors overwhelmingly told Ceres they ultimately want sustainability reporting listing standards — not voluntary guidance — that could be phased in over time.
Encouragement is good, but rules matter. Corporate Knights’ latest report on the state of global sustainability reporting found that “the more highly ranked stock exchanges have at least one mandatory, prescriptive requirement to regulate sustainability disclosure.” Consider also the SEC’s 2010 guidance on climate disclosure. The guidance helped companies identify material information that is legally required to be disclosed, but left them with significant discretion to make that determination. A 2014 Ceres assessment of the state of climate risk disclosure among the S&P 500 found that the majority of financial reporting on climate change is too brief and largely superficial. Forty-one percent of companies said nothing at all.
A legal requirement can be insufficient where it places too much discretion in the hands of the regulated entity. We also need precise requirements. Without them, investors will not have access to consistent and comparable sustainability information to make informed decisions.
For many companies, the question for sustainability reporting is not if, but how. Corporations that currently produce meaningful sustainability reports should be leading the charge for ESG guidance and, ultimately, ESG disclosure requirements from stock exchanges.
This may sound counter-intuitive. Why would companies join us in seeking disclosure rules? One reason is that many investors currently have difficulty using corporate sustainability reporting in their investment decisions because they cannot obtain comparable information from peer companies. Companies with long-established sustainability reporting commitments, therefore, may not be getting the full benefit from their reporting.
When we hear complaints of “survey fatigue” from the corporate community, we should remind them that the proliferation of sustainability surveys is a sign of an unmet demand for information from investors. Stock exchanges can meet some of this demand by setting baseline standards for all issuers. Those companies that do a good job of reporting will shine by comparison to their peers.
Perhaps most importantly, the Ceres report reflects an evolution in investors’ approach to that thorny question of materiality. The legal and academic debate about what the ‘reasonable investor’ wants is valuable, and will continue. But sometimes it makes more sense to just ask them.
Three years ago, Ceres released recommendations for stock exchange requirements on corporate sustainability reporting after an extensive international consultation with investors and the consideration of more than 100 institutional comments from six continents (I served on the drafting committee that produced these recommendations).
There was unanimous consensus on the proposal’s inclusion of a “materiality assessment.” Investors felt strongly that at a minimum, companies should have robust processes for identifying, discussing, and determining which sustainability issues were most material for them—not just from a financial materiality standpoint, but also for those issues that posed significant reputational, ethical, legal, and other harm.
Notably, the Ceres proposal included the following observation:
“Reporting that focuses exclusively on risks and opportunities to the issuer usually omits any discussion of risks and opportunities issuers present to others. Institutional investors, many of which have long-term investment horizons and are often invested across the economy, are particularly exposed to the systemic risks that result from short-term thinking and undisclosed externalities.”
The most significant risks we face are systemic. The information we currently receive is not.
Investors large and small are now ready to meet Chairman Carney’s challenge. To do so, we will need consistent and comparable information on material sustainability risks. World stock exchanges may be in the best position to provide us with that information, setting baseline standards across markets, upon which to build.