Sustainability Reporting as a Stock Exchange Listing Requirement?

By Michael Kramer

Sse logoWhat would it mean if companies were required to report on sustainability issues as part of being listed on a stock exchange? Brazil and South Africa exchanges have already taken this step, and last year at the Rio+20 Summit the United Nations launched the Sustainable Stock Exchange initiative to build on these efforts and encourage all members of the World Federation of Exchanges to require corporate disclosure of environmental, social, and governance (ESG) risks and solutions as part of their integrated financial reports. The SSE’s purpose is “to enhance corporate transparency, and ultimately performance, on ESG issues and encourage responsible long-term approaches to investment”. The idea has had a tepid response in this country until now, but engaging the stock exchanges in supporting responsible corporate behavior complements sustainable investors’ strategies with the Securities and Exchange Commission, trade associations, and companies directly via engagement and filing shareholder resolutions.

In April, The Investor Network on Climate Risk’s Listing Standards Drafting Committee issued draft recommendations for sustainability disclosure exchange listing requirements. The group includes a consortium of investors, including the AFL-CIO, Ceres, and Blackrock along with sustainable investment stalwarts Domini, Pax World, and Boston Common.

And NASDAQ OMX, which owns 24 markets across six continents, has already expressed support for the process. “Creating a corporate sustainability reporting standard across all exchanges will encourage a shift in how companies assess the importance of their efforts in environmental, social and governance issues,” said Meyer Frucher, vice chairman at NASDAQ OMX. “It is a win-win for both companies and investors, encouraging sound business practices and responsible investing.” The final version of the standards will be presented at the WFE’s annual meeting in October, and there is some degree of anticipated support for its passage.

Proposed disclosures by companies as part of a listing standard include:

Materiality assessment: Every company will discuss its process for determining the ESG factors material to its business, as well as the outcome of this materiality assessment, within its annual financial filings. They would be required to:

  • Discuss how they determined their material ESG issues;
  • Indicate who was involved in that process (including groups of stakeholders consulted, internal teams, and key management and board oversight);
  • Report on which ESG issues were determined to be material and why, including a discussion of both the risks and opportunities each issue presents as well as its connection to financial performance and business strategy; and
  • Periodically review the materiality assessment, update as necessary, and report on the frequency of scheduled reviews.

Alignment with the Global Reporting Initiative (GRI) Content Index: Every company will provide a hyperlink in its annual financial filings to a GRI Content Index, which will inform investors about the availability and location of a company’s ESG data. This requirement assures uniformity of reporting among companies while informing investors of the nature, completeness, and location of ESG information.

Improved corporate ESG disclosure: Companies must provide reporting on a “comply or explain” basis for the following eight key ESG categories, or must explain why they are not disclosing information on:

  • Climate change (e.g., greenhouse gas emissions and reduction initiatives, physical risks and opportunities);
  • Diversity (e.g., employee, board and supplier diversity; training and recruitment programs);
  • Employee relations (e.g., labor relations and freedom of association, safety, employee turnover and demographics, training, remuneration);
  • Environmental impact (e.g., water, energy and materials consumption; emissions and waste; toxins; packaging;
  • Government relations (e.g., political involvement and spending, contracting and revenue payments, tax strategy);
  • Human rights (e.g., non-discrimination efforts, prevention of child and forced labor, compliance with international human rights norms);
  • Product impact and safety (e.g., cultural and community impacts, product life cycle assessments, recalls, product integrity and safety); and
  • Supply chain (e.g., size and geographic scope, risks of disruptions (due to e.g. extreme weather events, labor disputes, etc.), impacts on local communities, labor and environmental compliance efforts

An independent and credible third party is proposed to evaluate and verify key ESG data within 5 years of the establishment of the listing requirement, which assures the credibility and reliability of the information being reported.

The Investor Network on Climate Risk (INCR) is a network of 100 institutional investors representing more than $11 trillion in assets committed to addressing the risks and seizing the opportunities resulting from climate change and other sustainability challenges. Through engaging corporate management, these investors are helping them evolve their internal policies and practices to address sustainability risks and opportunities while also championing climate and energy policies worldwide.

It would be quite something for a company to be delisted from an exchange for failing to properly report on ESG issues. The next step should be requiring companies to meet high ESG standards of operation rather than simply disclose their policies and practices. One step at a time…

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Michael Kramer

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