Exchange Leverage

Stock exchanges can enhance corporate environmental, social and governance (ESG) disclosure and performance by applying ESG standards within IPO and ongoing listing rules, corporate governance codes, and by offering ESG-related traded products.

A September 2010 paper by EIRIS, a global provider of ESG research, reviews the increasing role that stock exchanges play in enhancing corporate transparency and performance on sustainability issues. (Hat tip to SIF for bringing this to my attention.)

Some exchanges have already incorporated ESG reporting requirements in their listing rules and corporate governance codes. China’s Green IPO policy, which requires companies in 14 energy-intensive industries to undertake environmental assessments before initiating an IPO, is a good working example. Bursa Malaysia and the Johannesburg Stock Exchange are two of the leading exchanges that have incorporated mandatory ESG reporting requirements for all listed companies. The Australian Stock Exchange has incorporated an ESG disclosure requirement on a ‘comply or explain’ basis as part of its Corporate Governance Principles.

…Among the first indices on the market, the BM&F Bovespa ISE Index, the Dow Jones Sustainability Indexes, the FTSE4Good Index and the JSE SRI Index greatly contributed to the improvement of the ESG performance of companies and implicitly to raising the international profile of responsible investment.

However it is apparent that stock exchanges can do more… In June 2010, the UK’s Financial Reporting Council (FRC) revised the Corporate Governance Code to include engagement principles for institutional investors to take the ESG risks of their investee companies into account.

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