A group of investors representing over $13 trillion in assets and led by Ceres’s Investor Network on Climate Risk recently submitted recommendations to various global stock exchanges for a uniform mandatory stock exchange standard on corporate environmental, social and governance (ESG) reporting. These recommendations follow Ceres’s April 2013 consultation paper on this topic. The investors recommend exchanges consider adopting, and capturing in a global listing rule, the following three company requirements:
- First: Listed companies are to disclose in their annual financial filings a “materiality” assessment where management will discuss its approach to determining what ESG issues are material to their companies. According to the report, investors find this information critical in assessing a company’s management and its risk oversight.
- Second: Listed companies are to provide specific ESG disclosure on the following 10 ESG topics: (i) Governance and Ethical Oversight, (ii) Environmental Impact, (iii) Government Relations and Political Involvement, (iv) Climate Change, (v) Diversity, (vi) Employee Relations, (vii) Human Rights, (viii) Product and Service Impact and Integrity, (ix) Supply Chain and Subcontracting and (x) Communities and Community Relations. (Note, companies need not include this disclosure in their public filings. Further, companies can decide how to format this disclosure.)
- Third: Listed companies must include a hyperlink in their annual financial filings to an ESG Disclosure Index which will allow investors to understand what ESG information is available and where to find it.
While some exchanges, such as the Australian Securities Exchange, currently have certain limited environmental or sustainability disclosure requirements, they are few and far between. This proposal, if adopted, would significantly change the landscape and require a great deal of management analysis and corporate ESG disclosure that some companies, particularly non-European, may find quite time-consuming and potentially expensive, at least initially. For instance, the proposal would require companies use the definition of materiality adopted by the Global Reporting Initiative (GRI), as opposed to the more limited U.S. securities laws definition, to conduct the materiality assessment noted above. GRI defines a material topic as one that has a “direct or indirect impact on an organization’s ability to create, preserve, or erode economic, environmental, and social value for itself, its stakeholders and society at large.”
Ceres’s proposal comes at a time when support for a global sustainability listing standard appears to be growing. In addition to investors, the exchanges themselves are engaged. For instance, in March 2014, the World Federation of Exchanges (WFE), the trade association of over 60 stock, futures and options exchanges, formed a sustainability working group to encourage debate over ESG issues among its member exchanges and make corresponding recommendations. In addition, NASDAQ OMX, which has publicly advocated for uniform listing requirements for nearly two years, works with Ceres on this issue.
The WFE and member exchanges will review these recommendations during a several-month comment period. We should expect to hear more on this topic by the end of the year.