Proposals released for standardised stock exchange requirements on sustainability reporting

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27 Mar, 2014

Ceres, an investor-founded coalition of investors, companies, policy makers and others, has released recommendations through its Investor Initiative for Sustainable Exchanges for a global standard in stock exchange listing requirements on sustainability reporting. The proposals include three key requirements that should be captured, as a minimum, in listing rules for environmental, social and governance (ESG) disclosure.

The proposals are detailed in a report entitled Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting, and result from dialogue with institutional investors and stock exchanges around the world.  It follows an earlier consultation paper issued by Ceres' Investor Network on Climate Risk (INCR) in 2013.

In developing the proposals, feedback was received from over 100 investors, across all six continents, with the majority of the comments coming from the United States, United Kingdom, France, Germany, the Netherlands, South Africa and Australia. The development of the proposals also involved liaison with the World Federation of Exchanges, United Nations sponsored Sustainable Stock Exchanges (SSE) Initiative, the Principles for Responsible Investment's Sustainable Stock Exchanges Investor Working Group, the Friends of Paragraph 47, the International Corporate Governance Network and many other groups and networks involved in sustainability reporting.

The proposed listing requirements are as follows:

  • Item 1 - ESG materiality assessment. All listed entities would discuss its process for determining the environment, social and governance (ESG) factors that are material to its business, as well as the outcome of the assessment, within its annual financial filings. This disclosure would have three key components: how the factors where determined, who was involved in the process, and which issues are determined as material and why - as well as a discussion of both risks and opportunities presented by the material issues and their connection to financial performance, accounting, growth, market position, or business strategy. Investors felt this area was the most important to be included in the proposed listing rule and is designed to help companies focus ESG reporting efforts and prioritise information gathering and analysis
  • Item 2 - ESG issue disclosure. Disclosure, on a qualitative and quantitative basis, would be made in ten ESG categories, on a "comply or explain" approach for each category. The ten categories are (1) governance and ethical oversight (2) environmental impact (3) government relations and political involvement (4) climate change (5) diversity (6) employee relations (7) human rights (8) product and service impact and integrity (9) supply chain and subcontracting and (10) communities and community relations. Investors identified these categories as capturing areas of opportunity, broad systemic risk, and externalisation of costs to an investment portfolio across multiple industries and markets
  • Item 3 - ESG disclosure index. Every company would provide a hyperlink in its annual financial filings to an 'ESG Disclosure Index', using either the Global Reporting Initiative (GRI) Content Index or a functional equivalent. The index is designed to address investor concerns that finding existing ESG data for each company is currently a time-consuming and frustrating exercise, by informing investors about the availability and location of a company's ESG data and key performance indicators. It is also designed to establish a more systematic method for evaluation gaps in ESG reporting and to move ESG reporting toward greater consistency and comparability. This requirement is designed to be flexible to accommodate revisions to the GRI, and other guidance such as the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standard Board (SASB), CDP and others.

Additional guidance and rationale for each item is included in the report, outlining investors' reasons for including the requirement in the proposed rules, and recommendations for implementing each item.

In addition to the three key items, the report also contains a summary of additional recommendations for issuers, exchanges and regulators to consider in implementing sustainability disclosure requirements:

  • Financial and ESG reporting timeframes should be aligned within three years of implementation of any ESG listing rule
  • Investors would prefer that data presented in a company's ESG disclosures be independently assured within five years of any ESG listing requirement's issuance
  • Large issues should comply immediately with the listing rules, with a goal of all companies reporting within a timeframe of three years
  • Regulators are encouraged to work with exchanges to assess the overall level of ESG disclosure and reporting quality after two years, and then every three years thereafter, with systems developed to seek investor feedback on ESG disclosure quality, and occasional reports on emerging trends in ESG reporting produced
  • Additional disclosure categories (Item 2) may be pertinent to specific markets and industry distributions
  • A number of recommendations are made in relation to issuer education and capacity building.

The report also contains a summary of existing listing rule requirements on sustainability reporting from various exchanges.

The proposals are open for comment until 23 June 2014. Click for press release (link to Ceres website).

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