A line in the sand has been drawn on the short-term behaviour of all participants in capital markets – including companies, brokers, funds managers and investors – with the formal commitment of five stock exchanges to promote long-term, sustainable investment and improved environmental, social, and governance disclosure and performance among listed companies.
With a combined 4600 listed companies in developed and emerging markets, the five stock exchanges – NASDAQ in the US, the Brazilian BM&FBOVESPA, the Johannesburg Stock Exchange (JSE), the Istanbul Stock Exchange and the Egyptian Exchange – have voluntarily committed to work with investors, companies and regulators to promote long-term sustainable investment and improved environmental, social and corporate governance (ESG) disclosure and performance among companies listed on their exchanges.
The endorsements came during the Sustainable Stock Exchanges (SSE) 2012 Global Dialogue, held at the Corporate Sustainability Forum in Rio de Janeiro, an initiative co-organised by the Global Compact, the United Nations Conference on Trade and Development (UNCTAD), UN-backed Principles for Responsible Investment (PRI) and the UN Environment Program Finance Initiative UNEP FI).
Institutional investors can take some credit for the enrolment of exchanges in the take-up of ESG reporting (see table below).
Prime movers for good governance
The JSE, which was part of the commitment, was the world’s first exchange to require listed companies to disclose financial and sustainability performance in single integrated reports.
In a committed and bold move, from March 2010 the JSE requires companies to submit integrated reports or list elsewhere.
South African professor and corporate-governance advocate, Mervyn King, was instrumental in the exchange moving to integrated reporting, with the King Report on Governance for South Africa 2009 (King III) outlining many of the arguments.
King is also the chair of the International Integrated Reporting Council (IIRC), which comprises a cross section of international leaders from the corporate, investment, accounting, securities, regulatory, academic and standard-setting sectors.
The IIRC will publish the world’s first Integrated Reporting Framework by the end of 2013.
It believes that by reinforcing the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates, integrated reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing.
It says the integrated reporting framework will underpin and accelerate the global evolution of corporate reporting, enabling organisations to communicate the full range of factors that contribute to the creation of value and ensure they are embedded within an organisation’s strategy.
There is an Integrated Reporting Pilot Program, made up of 70 reporting organisations and the IIRC investor network of 20 investors chaired by Colin Melvin of Hermes EOS, which is providing feedback on the framework.
ESG disclosure call
|In January last year a group of 25 PRI investors sent letters to 30 stock-exchange chief executives and listing authorities around the world asking them to support their call for improved ESG disclosure. Here’s what investors wanted stock exchanges to consider:
|Encouraging better internal corporate governance within companies, such as improving structure, independence and quality of boards of directors and disclosing how sustainability issues are addressed at the board level.
|Consulting with companies on how they should be integrating sustainability into long-term strategic decision-making – such as highlighting risks and opportunities within the existing business model on their website and in their financial report. This includes encouraging companies to undertake integrated reporting.
|Distributing guidance for listed companies on material sustainability issues, global initiatives and other opportunities that encourage ESG disclosure.
|Mandating that listed companies have a non-binding shareholder vote on the sustainability report or sustainability strategy to be put to the AGM.