Greater engagement among exchanges on ESG disclosure and products

• Majority of responding exchanges perceived investor demand for ESG disclosure
• Lack of convergence on ESG standards and formats in the exchanges industry
• Green bonds became the most commonly offered ESG product for the first time

The WFE has been conducting an annual sustainability survey since 2014 that covers the nature and extent of member engagement with environment, social and governance (ESG) issues in both developed and emerging markets. Through the annual survey, the WFE and the industry are able to track the evolution of members’ engagement with ESG issues.

ESG is a core strategic mandate and principle of the WFE, the global industry group for exchanges and central counterparties, which published its first set of sustainability principles in October 2018. This year’s survey, the sixth in the series, is the second time that it had incorporated the principles to map the relevant activities of member exchanges.  

The WFE also partnered with the United Nations Sustainable Stock Exchanges (SSE) initiative to define and publish ‘How exchanges can embed sustainability within their operations: a blueprint to advance action’.

The latest survey was conducted in early 2020, with responses referring to developments and initiatives in 2019. A total of 61 exchanges participated, of which 56 are WFE members. Of these, six are derivatives-only exchanges.

The five sustainability principles covered in the survey comprise the following statements: “Educate market participants about sustainability issues; Promote the enhanced availability of ESG information; Actively engage with stakeholders to advance the sustainable finance agenda; Provide markets and products that support the development of sustainable finance and Embed sustainability into the exchange’s governance, strategy and organisation structures.

The survey revealed that exchanges continue to drive their sustainability efforts through engagement with the sustainability principles. Among the 61 exchanges that responded, 56 or 92% had introduced initiatives that observe at least one of the five principles and 41% had initiatives that correspond to all five.

 “Embed sustainability into the exchange’s governance, strategy and organisation structures” remained the principle with the highest exchange engagement at 89%.

“It is a good direction of travel. And engagement is the strong theme that comes out of the survey results. There has been growing engagement broadly with ESG issues among the WFE membership,” said Nandini Sukumar, CEO of the WFE.

Growing demand for ESG disclosure

While the majority, 85%, of exchanges encouraged the disclosure of ESG information, only slightly over half, 56%, had made it mandatory. Exchanges which required mandatory ESG disclosure comprise 14 in Europe, Middle East and Africa, of which 11 are in emerging markets, 14 Asia Pacific and only three in Latin America.

Exchanges themselves continue to be the major promoters of ESG disclosure. 82% of the stock exchanges either encouraged or required ESG disclosure.

And the reason for it according to Sukumar is a demonstration of leadership by the exchanges in driving ESG issues.  “If we want to improve, we should start with ourselves, we should lead by example,” she added.

“Exchanges have moved typically on ESG before regulatory requirement, and that is what you are continuing to see. And that's why you see sustainability concerns listed as the top priority and that demonstrates that exchanges have been driving the agenda, because they are the frontline regulators, to ensure fair and orderly markets, and market integrity,” she remarked.

Apart from sustainability concerns, 84% of exchanges cited “expanded business opportunities for the exchange” as the motivation for their initiatives - a sign said Sukumar “that ESG is becoming an integral part of exchanges’ strategies and ethos”.

This is borne out in the response to perceived investor demand. Eighty-seven percent of exchanges perceived at least some investor demand for ESG disclosure, while the percentage of exchanges who perceived extensive investor demand increased by 60% from the year before, from 18% to 29% in 2019.

Lack of convergence on ESG standards and formats

Despite the increased demand for ESG disclosure, the survey found that the majority of exchanges that encouraged or required reporting did not have specific standards and formats for companies to do so. In fact, some WFE member exchanges raised the global divergence on ESG standards and practices as a new concern in their sustainability efforts.

On the question about reporting formats, only 38% of applicable exchanges specified some requirements. The most common of which is “integrated with the annual report”. Other cited reporting formats include formats developed by the exchange or security regulators. The rest (62%) of the exchanges left it to the discretion of companies to decide which format to use.

In terms of reporting standards, only 17% of exchanges have specific requirements on ESG disclosure. The majority of exchanges promote any one of a number of reporting standards without mandating any specific one. Forty-seven percent of the exchanges suggested the adoption of an international reporting standard. The Global Reporting Initiative (GRI) is the standard that is most frequently cited by exchanges (43%).

The plethora and proliferation of standards, and the fragmentation of the market due to standards is one of the big themes of the survey said Sukumar. “As long as the majority of and a growing number of exchanges are encouraging or requiring ESG reporting and are asking for international reporting standards, then we are headed in the right direction,” she commented.

Green bonds are the most commonly offered ESG product

Another big theme of the survey is the emergence of green bonds as the most commonly offered ESG product. The survey also showed a mild increase in offerings across all sustainability product categories, demonstrating a gradual expansion of ESG products across

The proportion of responding exchanges offering ESG products increased slightly from 57% in 2018 to 59% in 2019. Green bonds surpassed sustainability indices as the most commonly offered ESG product for the first time.

There was also a moderate increase in offerings across all product categories, demonstrating an expansion of ESG products by exchanges. Futures contracts are the most commonly offered ESG derivatives. Other ESG products offered by exchanges included sukuk, charity bonds, green funds, charity funds, infrastructure funds and capital development certificates.

Exchanges are doing more to offer green and sustainable offerings, among the first to do so was London Stock Exchange Group (LSEG) which set up dedicated green bond segments in 2015. It also recently launched the Sustainable Bond Market (SBM) which includes new dedicated segments for social and sustainability bonds, in addition to the existing green bond segment, and information services that enable investors to incorporate climate and sustainability considerations into their investment process.

In 2016. the Luxembourg Exchange (LuxSE) launched the Luxembourg Green Exchange (LGX), a dedicated platform for green, social and sustainable securities. In March 2019, it partnered the Shanghai Stock Exchange to introduce the Green Bond Channel, which gives international investors access to data and information on Chinese domestic green bonds listed in Shanghai.

In Asia, the Singapore Exchange (SGX) is one of the leaders in the sustainability conversation with its green, social and sustainable offerings accounting for 55% of the estimated $7.8 billion in green securities issued in ASEAN in 2019.

The global green financing market is estimated to be worth about $258 billion, up 51% over a year ago. The Hong Kong Exchange and Clearing (HKEX) has also announced plans to launch the Sustainable and Green Exchange, ‘STAGE’, a new information platform for data and information to promote the visibility, transparency, and accessibility of sustainable and green financial products.

“There has been increased interest and appetite in setting up these green offerings. We expect the trend to continue and not just in equity exchanges but in derivatives exchanges. You're seeing more sustainability products, and equity exchanges are creating more dedicated market segments. They were across regions, across developed, emerging and geographies. That's a sign that it's strongly rooted. That has also been a lot of issuance of green bonds during the pandemic, and other interesting product categories, such as sukuk, with Malaysia as a big hub,” said Sukumar.

She observed that the green bond segment has been the fastest growing part of the ESG product segment at the moment accounting for over half of sustainability related bond markets.

“The market is dominated by Luxembourg which has a big footprint in sustainability linked bond and fixed income securities. What's interesting is that fixed income is traditionally not an exchange traded market. All exchanges in conventional product spend a lot of time and energy thinking about how they can have success on exchange traded bond markets. But in green it's been very successful,” she remarked.

She posed the question that hounds an increasing number of exchange chiefs, “Does ESG and the ESG investing drive retail participation in capital markets? We are thinking a lot about enhancing retail participation, individual investors, especially among the high net worth. Will this pandemic and the buzz around ESG finally improves the participation of retail and individual investors in the capital markets?”

She concluded, “The exchange industry leadership of sustainability continues to evolve. As the world seeks to rebuild a better, more inclusive society amid a global pandemic that has challenged many widely-accepted practices, exchanges are leading by example and are determined to be part of that solution.’’