Are you as heartily sick of reading about regulators’ inability to act on sustainability related issues as I am about writing them?
On top of the weak response on everything from perverse subsidies to carbon pricing, we can now add the poor record of financial regulators and stock exchanges in getting companies to divulge basic data about their environmental and social performance.
A new study benchmarking sustainability disclosures on the world’s stock exchanges points to a worrying levelling off in the number of companies that are reporting on six basic ‘first generation’ metrics; employee turnover, energy, greenhouse gases (GHGs), lost-time injury rate, payroll, waste and water.
It should come as no surprise to see that nine of the 10 top-ranked exchanges are located in countries with sustainability disclosure policies that are mandatory, prescriptive and broad, while nine of the 10 bottom ranked exchanges are based in countries without these policies in place.
It also does not take a great deal of intelligence to see that regulators need to get their acts together if we are to significantly change the current situation in which only 3% of the 3,972 world’s largest listed companies and 0.04% of the world’s small listed companies (20 out of 56,710) offer their stakeholders complete first generation sustainability reporting.
There is evidence to support the need for a tougher approach. BME Spanish Exchanges, for example, jumped to the leading spot in this year’s rankings, helped by legislation recently introduced by the Spanish government.
While the report from Corporate Knights Capital, with the backing of Aviva Investors and ratings agency Standard & Poor’s, paints a generally dismal picture, there are a few bright spots. In particular, while European stock exchanges accounted for eight of the 10 top-ranked exchanges, this belies the “incredible” catch-up process that is unfolding among stock exchanges in emerging markets, which are on track to overtake their developed-world counterparts in terms of quantitative sustainability disclosure performance by 2015.
But disappointingly, the report is far too diplomatic in its critique of the status quo and its recommendations are highly unlikely to drive significant change.
Its analysis does highlight that while stock exchanges have played a relatively minor role in the development of sustainability disclosure policy, their potential “is recognised to be hugely significant. By incorporating clear sustainability disclosure requirements into their listing standards, stock exchanges can create a powerful incentive for companies to measure and publicly disclose sustainability performance data to the market.”
Yet it suggests that exchanges have “legitimate concerns” that disclosure requirements will go against their core business model by scaring companies away from listing. This does not seem to make much sense, given the ‘first generation’ metrics are so basic in nature and that there is no excuse for any company not to measure and make them public.
The report makes clear it has found “sparse evidence” to back up the fears of the exchanges, but its main recommendation is merely that stock exchanges should “invest the necessary human and financial resources to fully explore the perceived negative trade-off between sustainability standards and the listing propensity of public firms. This could take the form of interviews with senior management at both existing and prospective listings.”
It further recommends that the World Federation of Exchanges develops a forum for its members to share best practices. These two recommendations are hardly the stuff on which legends are built.
The report similarly gives the securities regulators an easy ride. While it says they could play a significant role by integrating sustainability disclosure into capital markets requirements, it focuses on this being no easy task. This is because “sustainability data often falls into a grey zone insofar as financial materiality is concerned, which can give companies scope for legally circumventing disclosure requirements. Beyond these considerations, policymakers of all stripes are often burdened with a complex and almost overwhelming set of policy tools that can be used to drive corporate reporting practices.”
That may well be the case but look at what the report recommends; that the International Organization of Securities Commissions (IOSCO) set up a roundtable to explore whether (and how) capital markets rules to facilitate corporate sustainability disclosure could be in the long-term interest of its membership. Let’s admit that this is unlikely to get us anywhere soon at a time when the sustainability challenges we face are running away from us.
The track record of the financial sector does not inspire confidence. It’s not just that the regulators failed to prevent the financial meltdown, but the transparency of the financial sector in itself is appalling. In fact, it came bottom of all the sectors in the stock market benchmarking report.
Let’s face it. Companies measuring and reporting on their social, environmental and governance performance is only the first baby step on the path to doing something about it, so if we can’t get that right, what hope to do we really have.
Ernst Ligteringen, CEO of the Global Reporting Initiative, which produces one of the world’s most prevalent standards for sustainability reporting, introduces the benchmarking report with a timely reminder. “In the future, a company that chooses not to report will be sending a message loud and clear to markets. Its name will sit in the n/a category on electronic trading platforms. Not applicable. Not accountable. Subtext? Not a business to invest in.”
Let’s hope the regulators and the stock exchanges wake up and take note.
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