Hermes, Aviva Urge Stock Exchanges on Sustainability Reports

Aviva Plc and Hermes Asset Management Ltd. are urging stock exchanges to improve the way companies report on sustainability issues, leading calls from investors to introduce common international standards.

They’ll be joined by non-governmental groups at a United Nations forum in Rio de Janeiro to debate ways to make the financial industry focus on longer-term concerns such as environmental degradation and energy efficiency.

The organizations are seeking to standardize and improve sustainability reports, covering water use to emissions, after different rules emerged on world stock exchanges over the past decade. Today’s meeting also is designed to guide talks at this week’s Rio+20 summit in the same city, where delegates from 190 nations will discuss steps to eradicate poverty while stemming environmental degradation.

“We want the financial world to trigger their capital in the right directions,” said David Pitt-Watson, Hermes managing director and a senior adviser to Deloitte Consulting. “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.”

Exchanges in Sao Paulo, Copenhagen, Johannesburg and Singapore already have begun requiring members to report material information about environmental, social and governance risks in a way that allows investors to make comparisons. Others have yet to make such demands.

Five Exchanges

Two of those, in Sao Paulo and Johannesburg, announced today with Nasdaq OMX Group Inc. in New York and the exchanges in Istanbul and Egypt, to encourage their 4,600 listed companies to measure and report on environmental and governance issues such as greenhouse gas emissions, water usage and gender equality.

“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.

Institutional investors have pushed for better standards in reporting as they consider a broader range of issues affecting the quality of their investments.

Social Metrics

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, such as 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.

Denmark Compliance

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 who are required to document corporate social responsibility,” he said.

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 Chief Executive Officer Manuel Sanchez Ortega said in an interview at the New York Stock Exchange. “If you’re part of the global system, it’s very important,” he said.

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.

No Mandates

“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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