Financial and Monetary Systems

How can we create a more sustainable financial system?

Mindy S. Lubber
President, Ceres
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Financial and Monetary Systems

Seven years ago, we woke to news of the Lehman Brothers collapse and the landmark moment in this century’s biggest financial crisis. Amid all the blame, bailouts and bursting bubbles back in 2008, there was one universal action that everyone seemed to agree on: the need for transparency to better manage hidden risks in the financial system.

As President George W Bush said at the time: “One vital principle of reform is that nations must make our financial markets more transparent.” Investors such as the Board of the UN-backed Principles for Responsible Investment (whose signatories now manage almost $60 trillion of assets) called for “public disclosure of responsible investment activities … to build more sustainable financial markets”. The World Economic Forum’s own Global Redesign Initiative pointed to “information metrics to help anticipate risks, shape priorities and benchmark performance” as a key building block for a better financial system.

Have we let the light in?

Seven years later, have financial markets acted on the need for more transparency? We’ve seen some progress, such as the Dodd-Frank Act in the United States and the Directive on Non-Financial Disclosure in Europe, but large parts of the banking and investment markets remain disturbingly opaque.

In particular, more action is needed to ensure that publicly traded companies are transparent about their handling of environmental, social and governance (ESG) risks such as greenhouse gas emissions, water threats and child labour practices in the supply chain.

According to the Forum’s Global Risks Report 2014, seven of the top 10 most concerning global risks are ESG-related, including water crises, climate change and chronic underemployment.

The missing piece in the puzzle

Ceres works with hundreds of investors across the globe and it is clear that their ability to invest with long-term sustainability concerns in mind is impaired by this lack of transparency. How can an investor – like your pension or mutual fund, perhaps – reduce its exposure to carbon risk when most large companies in most sectors do not report their carbon emissions?

In scrutinizing businesses across key sectors, investors want to compare “apples to apples”. Global investors know that financial indicators, such as profit and loss statements, are calculated in similar ways across the world. There is a golden thread in the data from Sydney and Shanghai to San Francisco. However, this is rarely the case when it comes to sustainability indicators such as carbon pollution, water usage and worker safety performance. And that means greater hidden risks for investors, which prevents them from making smarter investment decisions.

In search of the material and meaningful

Stock exchanges are uniquely positioned to provide this golden thread for sustainability transparency. It is their listing requirements and market influence with member companies that can ensure companies file ESG data that is material, meaningful and comparable with their peers.

We have seen real leadership by some individual companies in improving their disclosure of ESG risks and opportunities in recent years. We’ve also seen great progress by some stock exchanges, such as those in Hong Kong, Australia and Malaysia, which have all proposed progressive sustainability listing rules or guidance. In the US, Nasdaq has helped launch a sustainability working group for the World Federation of Exchanges and was the first North American exchange to join the UN’s Sustainable Stock Exchanges initiative.

But we need a more comprehensive approach to ensure the consistency of global sustainability data.

That’s why Ceres organized 100-plus investors, managing over $9 trillion of assets, to send a joint letter last year to the global regulators’ hub, IOSCO (the International Organization of Securities Commissions), asking them to show leadership to drive this effort forward.

We also brought together over 100 institutional investors to draft the Investor Listing Standards Proposal, which includes specific recommendations for integrating sustainability disclosure requirements into stock exchange listing rules. This effort was instrumental in the lead-up to last week’s launch of the UN’s Model Guidance on Reporting ESG Information to Investors – which I hope will catalyse stronger disclosure measures from stock exchanges across the world.

Voluntary is not enough

Investors have made it clear that to get the consistent rules and structure they need across global markets, we need regulators to enforce mandatory sustainability reporting in all jurisdictions.

And it is not just investors who agree with a mandatory approach, but stock exchanges themselves. A survey of leading stock exchanges in 2012 found that more than a third agreed that ESG disclosure measures should be mandatory.

It’s no coincidence that from Australia to Amsterdam, the world’s top 10 stock exchanges on the release of sustainability information are all in jurisdictions with mandatory disclosure policies. Most of the exchanges are in Europe. None are in the US, which is ironic given our role in sparking the global financial collapse seven years ago.

The oil in the engine

No doubt, transparency is the oil in the engine when it comes to making our global capital markets operate more sustainably.

With the right amount of transparency, the engine can run smoothly and efficiently while also improving conditions for the planet and mankind. Without it, the engine will ultimately break down, with a potentially catastrophic impact.

Seven years on from the worst financial crisis in recent history, now is the time to close the corporate disclosure gap on key ESG issues. Otherwise global sustainability threats such as a warming planet may catalyse economic and financial ripples far worse than those we saw in 2008.

We need all stock exchanges to act now to ensure robust ESG disclosure. Because if not now, then when?

Have you read?
5 ways technology is transforming finance
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Author: Mindy Lubber is President of Ceres, a nonprofit organization that leads a coalition of investors, environmental organizations and other public interest groups to address sustainability challenges such as global climate change and water scarcity.

Image: A man takes pictures with his smartphone at a screen showing stock market prices inside a brokerage in Taipei, Taiwan, August 25, 2015. REUTERS/Pichi Chuang

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