Before we begin … We don’t see any value in NDCi.global adding to the torrent of comment on Trump’s June 1 Paris announcement at this stage. For what it’s worth, we subscribe to the general reaction at this point that the agreement itself is robust enough to withstand this shock. What’s less apparent at this point is how the climate finance space could be affected. We will try to get some reaction on that and report back soon. It’s just possible though, that this development could create an opportunity to restructure some of these funds.
– Ian and Tessa
In the second of what we intend as a periodic series of thematic briefings (the first was on adaptation), we look at recent developments among a cohort of institutions that have twin roles as both markets and regulators.
These are the world’s stock exchanges, where investors gather both nationally and internationally to buy and sell equity investments. As well as providing this market platform, however, stock exchanges also act as the regulators of important aspects of market behaviour. For example, they set the rules that major companies and funds listed* on the relevant exchange must follow in terms of financial reporting, and the processes to be followed when companies are bought, sold or merged.
Since stock exchanges are where liquid* investments in the world’s largest companies and funds are bought and sold, they are critical to channelling funds for Paris. In particular, whilst major stock exchanges were once confined to the most developed countries, they are now in nearly all significant emerging markets, bringing the money held in domestic capital markets into play as part of the Paris mix.
Possibly more critical is their regulatory capacity to enforce good climate change behaviour on their listed entities. This is done, for the moment, through guidelines for reporting on ESG factors for each company and fund. In other ways, as we will see, they also provide the framework for green funds to access retail and institutional investors to invest directly into green bonds.
In this briefing, we provide a roundup of what’s been happening in Stock Exchanges in recent months, as they position themselves for a greater role in channelling investment flows related to green and climate finance. None are specifically related to the NDCs, but we believe that the developments we are seeing are solid evidence that stock exchanges are seeking to “green” themselves and those they regulate.
The global industry body of the future?
Organised under the auspices of the UN and the Principles for Responsible Investment (PRI), the Sustainable Stock Exchanges initiative (SSE) is a peer-to-peer learning platform. It focuses on how stock exchanges, in collaboration with investors, regulators, and companies, can enhance corporate transparency – and ultimately performance – on ESG* issues and encourage sustainable investment.
Established in 2009, the first five SSE Partner Exchanges – In Brazil, Egypt, South Africa, Turkey and the USA – are now joined by nearly all major stock exchanges worldwide from both developed and emerging countries.
This month SSE has launched its Green Finance Workstream, with a meeting of advisory groups in Geneva. Working with stock exchanges, regulators, institutional investors, issuers*, financial services firms and civil society, it has developed a new voluntary green finance toolkit which will be launched at COP23 in November.
It Started In Brazil …
The BM & FBOVESPA Exchange in Brazil was the first in the world to join the Global Compact, in 2004. The Global Compact is a UN initiative that aims to mobilise the international business community to adopt, in its business practices, fundamental and internationally accepted values in regard to human rights, labour relations, the environment and prevention of corruption.
The Global Compact stipulates that companies report their progress annually as regards the Ten Principles of the Compact, through a Communication on Progress (COP) on the Compact’s website.
In this context, since 2017 the Exchange has been the vice-president of the Global Compact’s Brazilian Committee.
The Egypt Exchange (EGC) is a member of the Federation of East Asian Stock Exchanges (FEAS), which has 33 members from the region. It has become the first public institution in FEAS to become fully sustainable in its operations. It has done this to provide an example to its listed companies and other market participants, to illustrate how the objectives of sustainable development can be achieved in practice.
EGC’s first Annual Sustainability Report has just been issued, covering its performance against its sustainability goals in 2016. These included the accession of the exchange to the Global Compact, as well as signing the “Marrakech Commitments for the Development of Green Capital Markets in Africa”.
Read more: Annual Sustainability Report – FEAS
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NASDAQ Nordic and Baltic Exchanges
This is a grouping of seven Baltic area exchanges, namely Stockholm, Helsinki, Copenhagen, Iceland, Tallinn, Riga and Vilnius. The grouping has just issued (voluntary) ESG guidance for reporting to its listed entities.
New York Stock Exchange, USA
The New York Stock Exchange has also been attending to ESG matters, with the launch of a new repository of ESG reporting resources on its website. This includes a range of tools for listed companies to better understand environmental, social and governance disclosure. The Exchange said that as more and more exchange-listed companies start to work towards meeting investor demand for disclosures of this kind, it along with other exchanges is providing resources to these companies to help them achieve best practice.
Bursa, Malaysian Stock Exchange
In October 2015, Bursa Malaysia launched a new sustainability framework for its public listed companies, together with a sustainability reporting guide and toolkit.
This mandated all listed companies to publish sustainability reports in stages over a three-year period. Those with a market cap greater than US$450 million will be required to disclose a sustainability statement in their annual report issued for the financial year ending 31 December 2016; with the remainder required to do the same by 2018. The first annual reports under the new rules are imminent.
Read more: Sustainability in Malaysia – Eco-Business
Deutsche Borse, Germany
Deutsche Börse has announced it has become part of the Climate Bonds Initiative Partners Programme, where it will develop climate finance solutions, participate in market development committees and help define policy agendas for national, regional and sector-based schemes.
The programme aims to accelerate the use of green bonds and other green debt products to boost climate investments and support emissions reduction plans.
Shenzhen Stock Exchange, Republic of China
The SzSE released a green bond index, the CUFE-CNI Bond Series Index, a few months ago. It provides a new investment and pricing benchmark for green bonds in China, and is listed on both China and Luxembourg Stock Exchanges.
Nine component indices include high-level green bonds, high-level labelled green bonds and high-level non-labelled green bonds. The new index has been launched to assist in propelling the internationalisation of China’s green finance. The two partner exchanges will jointly facilitate the listing of green index fund products in Chinese and European markets.
But not everyone has yet smelt the coffee…
Just issued, this 2017 edition of the OECD Corporate Governance Factbook provides this first comparative report on corporate governance across all OECD, G20 and Financial Stability Board member jurisdictions. It now covers 47 different jurisdictions hosting 95% of all publicly traded corporations in the world as measured by market value.
It specifically covers, therefore, the entities listed on all those stock exchanges. In reading its 144 pages, there is not one mention of climate change, ESG, or the Paris Agreement.
Maybe it is time that it was made mandatory for all listed companies and funds on the stock exchanges globally to commence reporting on the risks to their business of the consequences of climate change. Board risk committees have a legal obligation to consider and report to the board, and through them, to shareholders, all significant risks.
If they consider there are no risks from climate change, they could report that also. And let shareholders value them on that basis.
Read More: Corporate Governance Factbook 2017 – OECD