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11.10.2009 - 11:10PM

Category: Sustainability

Making (Ex)change: Global Stock Markets Push Sustainability

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By CSRwire Contributing Writer Bill Baue of Sea Change Media

Exchange on stock markets has traditionally fueled financial gain (and loss) without regard to environmental or social consequences, but that trend is verging on change. Last week, representatives from stock exchanges around the world convened at the United Nations for a one-day conference entitled Sustainable Stock Exchanges to consider how investment markets can drive positive environmental, social, and governance (ESG) transformation. While the trend is not exactly new, as I documented in a 2008 UNCTAD report citing examples in Malaysia, South Africa, and Australia, this conference is a first for airing the issue under the spotlights of a global stage.

Transparency emerged as a key tool for promoting sustainability at the conference. Specifically, stock exchanges could mandate corporate ESG reporting as a listing requirement. Unsurprising, given that event sponsors included the UN Global Compact and the UN Principles of Responsible Investment (PRI), both of which prefer transparency over policing as the mechanism for pushing progress in their members’ sustainability practices. In other words, GC and PRI require companies and institutional investors (respectively) to report on their progress toward sustainability, instead of mandating actual practice, on the logic that transparency drives action. The “carrot”? UN imprimatur. The “stick”? De-listing, which both GC and PRI do for transparency shortcomings, but not for deficiencies in practice.

Applying such carrots and sticks to stock exchanges raises the stakes significantly. Stock listing provides vital lifeblood (cash) for companies, while de-listing amounts to a financial death knell. Some exchanges, such as Istanbul’s, spurn de-listing in favor of governance indexes to incentivize improvement. Others prefer more bite than bark, such as Egypt’s that de-listed 750 companies to leave only 350 well-governed companies, according to Conference Moderator and FORTUNE Contributing Editor Marc Gunther in a post-event blog.

True to his characteristic skepticism of regulation, Gunther throws his weight behind ESG indexes and socially responsible investing (SRI) funds as incentives to drive "what is potentially a revolution in finance. If they outperform over time, more money will flow to companies with good ESG practices," Gunther writes. And there's growing evidence that companies with good ESG practices outperform financially, including the study that just won the 2009 Moskowitz Prize from the Social Investment Forum and the University of California, Berkeley's Haas School of Business. It correlated better corporate social performance with better corporate financial performance.

While I agree with Gunther that sustainable investing can support corporate implementation of ESG practices, I questioned the scale, quality, and pace of this development in the comments section of Gunther's blog. Recent reports from Robeco and Business for Social Responsibility document an increase in ESG integration amongst mainstream investors, but "at what point will the mainstream 'tip' into factoring ESG issues at the core of investment decisions?" I asked. "And how much 'teeth' will the ESG integration have - window dressing or fundamental change?"

These are not rhetorical or academic questions, given the pace and scale of climate change, and the role of traditional business and investment models in creating and now exacerbating the "positive" feedback loops of climate change.

Aviva CEO Paul Abberley, who had a guiding hand in creating the conference, similarly hones in on the question of stock exchanges providing the necessary leverage to transform the foundational structure of companies toward sustainability. "Our main focus is on promoting a global listing environment that requires companies to consider how responsible and sustainable their business model is," Abberley stated, "and also encourages them to put a forward-looking sustainability strategy to the vote at their AGM." It remains to be seen if these teeth have enough bite to generate sufficient change, if they first pass muster for implementation.

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