Nasdaq OMX Group Inc. (NDAQ) joined stock exchanges in Sao Paulo, Johannesburg, Istanbul and Cairo in an effort to require listed companies to report material information about environmental, social and governance risks.
The exchanges agreed to urge their more than 4,600 companies to measure and report on environmental and governance issues such as greenhouse gas emissions, water usage and gender equality, or explain why they won’t. They are also asking more exchanges to join the effort.
The decision gives a boost to the investor groups led by Aviva Plc (AV/) and Hermes Asset Management Ltd. and the United Nations, which have urged stock exchanges to prod companies toward better reporting sustainability issues. They’ve called for common international standards and have pushed envoys from 190 nations at a UN conference in Rio de Janeiro to support their stand.
“We want the financial world to trigger their capital in the right directions,” said David Pitt-Watson, who chairs Focus Asset Management at Hermes in London. “We’re saying, let’s have a user-friendly regime with comparable data. Most people say this is a no-brainer once they understand it.” The investor groups are concerned that sustainability reporting isn’t done to a common standard and that a patchwork of differing rules and practices has grown in the past decade. Institutional investors have pushed for better standards in reporting as they consider a broader range of issues affecting the quality of their investments.
“The problem with some of the sustainability reports is they’re not really material, and they’re not as relevant as they ought to be,” said David Blood, co-founder of Generation Investment Management with former U.S. Vice President Al Gore. The companies need to work harder to “make it material and make it relevant,” he said in an interview.
Efforts by companies, industries and large accounting firms to reinvent performance measures on environmental, social and governance issues, or ESG, demonstrate the challenge ahead. While some metrics, such as emissions or water use, are easier to standardize, social metrics, including board or workforce diversity or community relations, are harder to value.
Stock markets provide a forum for investors and companies to negotiate these issues. That’s what makes any possible global framework for changing how listed companies report potentially significant.
“We’re expecting companies to come forward with commitments to improve their reporting on renewables and sustainability goals,” said Jacob Scherr, director of global strategy and advocacy at the Natural Resources Defense Council in Washington, which will take part in today’s meeting.
Brazil’s main stock exchange, Bovespa, issued a policy in January recommending that listed companies declare whether they report ESG data, and if not, why not. This month it announced the first results of its “Report or Explain” project, which is analyzing sustainability disclosures through the end of May.
The Copenhagen exchange, owned by Nasdaq OMX, also has a “comply or explain” principle on corporate-governance transparency, according to spokesman Javier Lopez. “There is a government requirement that applies to the top 1,100 companies that are required to document corporate social responsibility.”
Aviva, the U.K’s largest insurer, Munich Re and other investors have been working with the UN on the Sustainable Stock Exchanges campaign to reach a worldwide commitment on reporting requirements.
The initiative will help investors measure a company’s sustainability efforts on an “apples-to-apples basis,” Abengoa SA (ABG) Chief Executive Officer Manuel Sanchez Ortega said in an interview at the New York Stock Exchange. (NYX) “If you’re part of the global system, it’s very important.”
While Europe, South Africa and Brazil have led efforts to require more reporting, U.S. exchanges as yet have no plans to require companies to report risks associated with climate change, water use or workplace diversity.
“We don’t have any mandates for our listed companies in terms of sustainability reporting,” said Rich Adamonis, a spokesman for NYSE. “We don’t have a position on that.”
According to London-based Aviva, NYSE is in the majority, with 57 percent of global exchanges not providing guidance to listed companies on sustainability reporting.
Meanwhile, voluntary reporting on sustainability measures has grown with investor demand. Corporate signatories to the UN- sponsored Global Compact jumped 54 percent last year to more than 7,000. The organization is the world’s biggest voluntary campaign to introduce standards on sustainability issues.
U.S. companies operating in regions that request reporting on sustainability may face increasingly complicated requirements that they don’t get back home, Hermes’s Pitt-Watson said.
“If we don’t get the framework developed in Rio, it will be hugely costly and take far longer to complete it voluntarily,” Pitt-Watson said. “There will be hundreds of different regulations.”
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