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Jun 14, 2017

UN PRI: Transparency holds the key to sustainable markets

There’s an information gap when it comes to ESG reporting

Transparency is a key driver for creating sustainable capital markets and should form a core part of the business model of every player within the financial services sector, including stock exchanges. Global stock exchanges list more than $70 tn of market capitalization, ideally placing them to drive long-term value creation through improved market transparency.

The United Nations Sustainable Stock Exchanges Initiative (SSE), launched in 2009 and co-organized by a number of other UN programs, including the UN-supported Principles for Responsible Investment (PRI), has been successful in bringing global exchanges together, along with investors, regulators and companies, to enhance corporate transparency on ESG issues.  Eight years after launch, the SSE today includes 60 stock exchanges, representing more than 30,000 listed companies.  

The investors we work with at the PRI explicitly acknowledge the relevance of ESG factors, and the importance of stable markets. They also consider evaluation of ESG issues to be a fundamental part of assessing portfolio value and investment performance. For many investors, a sustainability strategy includes a long-term rather than a short-term view of investing. But investors looking at long-term horizons need improved ESG information and, currently, our markets are failing them. 

In September 2015 the SSE launched its Model Guidance for Exchanges, to provide guidance to issuers on reporting this information. Prior to this, less than one third of stock exchanges globally were providing guidance to issuers on reporting ESG considerations. This type of information gap leads to incomplete corporate information, and creates a challenge for investors seeking a comprehensive view of a company’s material issues. 

Based on the SSE Model Guidance, the World Federation of Exchanges has created a set of recommendations for its member exchanges on how to implement their own sustainability policies. 

In February the London Stock Exchange (LSE) Group, in response to demand from investors for a more consistent approach to ESG reporting, issued its guidance document, Your guide to ESG reporting. Recent research from LSE Group suggests that only 30 percent of 3,000 mid- and large-cap companies across 46 countries disclose ESG information deemed material for their sector. 

At the same time, a 2016 survey by PwC finds that while all issuers surveyed are confident they are delivering high-quality information on their sustainability performance to investors, 70 percent of investors express dissatisfaction with the quality of information made available to them in these reports. Clearly, an information gap is occurring.

Link with the SDGs

Transparency is also linked to the UN’s Sustainable Development Goals (SDGs), which serve as an international work plan for improved approaches to development and generating long-term value. There is one dedicated goal on climate change (SDG 13), but indirect links to climate change appear in 10 other goals – proof that in order to meet the SDGs, we need better disclosure. 

In the coming months, the SSE will be working with stock exchanges, investors and other stakeholders to explore how exchanges can further advance green finance in their markets. We look forward to seeing the outcome of this work at COP23 in Bonn, Germany in November 2017.  

While progress on responsible investment has undoubtedly been made in the last decade, we still have much to do. The PRI is about to undertake an ambitious program to promote a sustainable financial system as part of our 10-year Responsible Investment Blueprint. It will address the risks and challenges undermining the sustainability of financial markets by putting in place a series of steps that will lead to changes in the system, particularly focusing on institutional investors and the intermediated investment chain. 

The uncertain times in which we live require leadership and collaboration. We believe the SSE’s partner exchanges can contribute to a real improvement in market transparency and performance on ESG issues.    

Martin Skancke is board chair at the UN PRI