Let’s talk: sustainability

An update on the World Federation of Exchanges

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The NASDAQ OMX stock exchange formally announced its commitment to advance sustainable investment and environmental, social and governance (ESG) disclosure for companies listed on its exchange in 2012.

The NASDAQ OMX and the New York Stock Exchange (NYSE) are the major exchanges included in the Investor Network on Climate Risk (INCR) Sustainable Stock Exchanges (SSE) Working Group which is currently collaborating on a standards proposal.

Although not yet a condition of listing, many indicators suggest that ESG reporting recommendations may soon be requirements, including NASDAQ’s engagement regarding sustainable investing with the World Federation of Exchanges (WFE) — the largest trade association of 57 publicly regulated stocks, futures and options exchanges.

The groundswell movement of organizations pursuing sustainable investing indicates that mainstream investors find value in ESG disclosure. In a recent EY global institutional investors’ survey, nine out of ten investors said a company’s non-financial performance played a pivotal role at least once in their decision making on an investment in the last 12 months.

Due to the uncertainty surrounding ESG disclosure as a requirement for listing, companies are often confused as to what they should do and when. There are several indices that can serve as an example of what future requirements may look like.

For example, beginning in 2010, the Johannesburg Stock Exchange (JSE) in South Africa required its 450 listed companies to produce an integrated annual report – a concise communication about how an organization’s strategy, governance, environmental and financial performance lead to value creation. More recently, government regulation has required all companies listed on the London Stock Exchange to report GHG emissions.

In total, as of 2012, governments or stock exchanges in 33 countries have some form of mandatory reporting requirement. Additionally, in the US, non-financial data is voluntarily reported in annual reports and SEC filings and captured by sources such as Bloomberg terminals and others.

The combined interest of the INCR, NASDAQ and WFE in a sustainable stock exchange initiative indicates that investors find increasing value in ESG data. It is beneficial for companies to establish a system for capturing key ESG metrics and develop a process for measuring non-financial data before such guidance becomes mandatory for listed companies on main US exchanges.