Sustainable Stock Exchanges: A Coalition-of-the Willing?

By CWR 10 March, 2011

We take a look at where Chinese exchanges stands on water disclosure & sustainable stock exchange initiatives.

Editor’s Note: In March of last year, China Water Risk launched a report, in collaboration with Civic Exchange and the Institute of Public and Environmental Affairs, revealing that 15% of companies listed on the HKEx have environmental violation records on the mainland and many are repeat offenders. We believe that better environmental disclosure requirements from the HKEx would not only help reduce investment risk and protect investor interests, but could strengthen environmental protection in China.

The UN ( through a joint initiative between United Nations Principles for Responsible Investment, the United Nations Conference on Trade and Development and the UN Global Compact) is also pushing the agenda forward with the set-up of a global dialogue on sustainability and the role  of Stock Exchanges at a high level. Its second session held in Xiamen September 8th 2010 have included Liang Geng the chairman of the SSE ( Shanghai Stock Exchange ), Shang FuLin, Chairman of China Securities Regulatory Commission (CSRC) as well as Serge Harry, Executive Vice President NYSE Euronext  have discussed key issues such like improving the ESG practices of listed companies.

Contributing to the dialogue investor research house Responsible Research undertook a survey of the state of play regarding the adoption of ESG initiatives by Exchanges.

China Water Risk summarizes the development of Sustainable Exchanges. In September 2010 ASrIA’s Dave Doré explained why in Asia Institutional Investors have a significant role to play in the promotion of Sustainable Stock Exchanges and ESG Disclosure Requirements.

Pushing the ESG Agenda

Stock exchanges are in a unique position to facilitate corporate transparency and influence the behavior of listed companies, including their environmental, social and governance (ESG) performance. With the largest IPO ever in July 2010 (the Agriculture Bank of China), the China bourses Shanghai ,  Shenzhen  and Hong Kong , represent a global market  weighting of more than 16.5% and are thus in a notably influential position.

In 2009 the United Nations Conference on Trade and Development (UNCTAD), the UN-backed Principals for Responsible Investment (UNPRI) and the Global Compact jointly developed an initiative – Sustainable Stock Exchanges (SSE) aimed at exploring:

How the world’s stock exchanges can work together with investors, regulators, and companies to enhance corporate transparency, and ultimately performance, on ESG issues and encourage responsible long-term approaches to investment.

With the support of PRI signatories such as Aviva Investors, the initiative has on two occasions convened leading investors and senior executives from stock exchanges around the world to discuss the influential role of the Exchanges in relation to corporate ESG performance. The first of these events in 2009 gathered 100 of these constituents and examined the existing state of play, emerging trends and opportunities in relation to the ESG agenda. This first meeting paved the way for further exchanges and a second meeting was convened in 2010 which bought together 1500 industry leaders at the World Investment Forum in Xiamen, China.   This time the dialogue sought to determine progress since the previous meeting, delving deeper into policy issues, action, challenges and ultimately the way forward. Another SSE Global Dialogue is scheduled for May 2012 at the UN Earth Summit in Rio. Thirty leading exchanges will be invited in addition to other exchanges.

Five months after the China meeting, Reuters reported that a coalition of institutional investors worth 1.6 Trillion USD had signed a joint letter to advocate the 30 largest stock exchanges to improve sustainability reporting of their listed companies.

The world’s leading stock exchanges on ESG

In preparation for the 2010 Stock Exchanges dialogue in Xiamen, Responsible Research (RR) was commissioned by Aviva with support from UNCTAD to undertake targeted research which would assess current sustainability structures and practices at thirty of the world’s largest stock exchanges by market capitalization. This research which was completed in the last quarter of 2010, effectively framed the discussions at the forum. Based on questionnaires, it gauged:

• the extent of ESG related practices currently implemented by the Exchanges such as: the  provision of guidance on sustainability practices for listing companies; requirements to meet ESG criteria; the offer of sustainability indices; and carbon markets.
• what action would the Exchanges be prepared to take, or are planning to take  to integrate sustainability into their processes – e.g. through listing requirements, shareholder policies, corporate disclosure requirements.

Sixteen exchanges responded and the research findings were used to inform the Xiamen meeting. Key issues highlighted in RR’s report  are summarized below:

• Stock exchanges favor voluntary initiatives as opposed to mandatory practices and there was little interest in altering listing requirements.
• Sustainability reporting  was identified as being overlooked by the investor community
• Products offered by exchanges can be an effective way to encourage asset owners and managers to be more responsible as regards ESG issues.  Of the thirty exchanges included in the study,  70% either already have, or are planning to introduce sustainability indices
• The short term nature of exchanges and investors creates a barrier to sustainability.
• Regulators were found on the whole not to stipulate mandatory ESG reporting requirements for companies listing, thus there is no level playing field for corporates.

So which exchanges were found to be pursuing sustainability? RR highlights the following examples amongst many others:

Detailed findings of the research including the constraints facing the Exchanges as well as opportunities can be found on Responsible Research’s web-site: Sustainable Stock Exchanges: Real Obstacles, Real Opportunities.

Looking forward, an organisation that needs mention in the debate over sustainable stock exchanges is the International Integrated Reporting Committee (IIRC) which aims to develop a new internationally accepted approach to reporting.  The idea on sustainability is to show how financial, environmental, social and governance aspects of a company’s operations are connected, thus facilitating the assessment of sustainability performance. If successful, such an initiative would make the stock exchanges’ task easier in requiring ESG reporting.  In 2011, IIRC proposes to draft both a discussion paper on integrated reporting for public consultation as well as proposals to go to the G20 in November.

Where do China’s stock exchanges stand?

The Chinese stock exchanges have been receptive to the SSE initiative. The Chairman of the Shanghai Stock Exchange, Mr. Liang Geng, spoke at the 2010 SSE Global Dialogue as did the President of Shenzhen Stock Exchange, Ms Li Ping Song.  However, neither the Shanghai nor the Shenzhen Stock Exchanges responded to Responsible Research’s information request (the Hong Kong Exchange did respond). So what do we know about these Exchange’s approach to ESG issues?

In 2006 the Shenzhen Stock exchange issued CSR guidance for listed companies. In 2008 the Shanghai Stock Exchange followed suit and issued the ‘Notice of improving Listed Companies  Assumption of Responsibilities’ and the ‘Guidelines on Environmental Information Disclosure by Listed Companies’. According to these notices, listed companies should address their social responsibility and promote sustainable development, such that punishment maybe imposed in response to violations, although the exact nature of such interventions is unclear. For further information the World Federation of Exchanges provides a case study on the Shanghai Stock Exchange .

Also in 2008, the Ministry of Environmental Protection (MEP) in partnership with the China Securities Regulatory Commission (CSRC) launched the ‘Green Securities Policy”. The aim is to make it harder for enterprises in polluting industries to access capital by requiring companies listed on the stock exchange to disclose more information about their environmental records.  In addition the “Green IPO/SEO” was introduced in June of the same year requiring that companies operating in specified industries must undergo an environmental assessment by MEP before launching an IPO or SEO.  During a 10-day pre-IPO evaluation period, MEP conducts its own assessment and solicits the public’s opinion.  If MEP approves the company, it then issues a permit to let the IPO proceed.  Today, the Shanghai Stock Exchange also expects companies to produce CSR Reports that are separate from their Annual Reports.

In 2009, the Shanghai Stock Exchange and China Securities Index Company Limited also launched the SSE Social responsibility Index – the constituents of which consist of 100 listed stocks with good performance in relation to social responsibility. In September 2010, China launched its first ESG index. ESG then does appear to be on the agendas of China’s Exchanges, despite their relative silence.

In September 2010, MEP issued a consultation document on a Guide to Environmental Information Disclosure of  Listed Companies,  targeting sixteen polluting sectors. The new proposal requires that  listed companies should publish annual environmental reports, periodic disclosure of pollutant emissions, environmental compliance, environmental management, environmental information; and  details of environmental accidents should be released within 1 day of the incident. Failure to comply would result in penalties.

In Practice, what impacts have such measures had? Whether, or the extent to which companies have been denied listing because of pollution infractions is difficult to determine.  The enforcement of the Exchanges’ rules is however considered to be limited though some listed companies have responded positively to the new guidelines and committed to disclose environmental information. Companies such as PetroChina and Sinopec are disclosing relevant data.  At the end of 2010 Alex Wang of NRDC reported on China’s progress in environmental transparency generally, providing interesting insights into the direction that China is going.

Specific instances where we can see the implementation of the guidelines are the cases of the listed company Zijin mining and the pre IPO delays for Gold East Paper:

Zijin mining (SRHK:2899), (SSE:601899) – In July 2010, Zijin Mining released 9100m3 of contaminated waste water into the Ting River, causing fish kills. The company didn’t disclose the leak for nine days, two days longer than the mandatory reporting requirement. According to a China Dialogue feature on Zijin in September 2010, MEP had issued stern warnings to the Company both before and after it listed. As China Water Risk pointed out in a  previous  article , these warnings were ignored. An issue here appeared to be the fact that the county government was a significant shareholder in the company and was complicit in the late notification; in addition the local enforcement authorities were not acting on this and previous pollution incidents. The end result was that the mine was closed pending rectification and it will need to invest in water treatment equipment if it is to reopen as well as being mandated to pay compensation.

Gold East Paper – In August 2008, Gold East Paper submitted its IPO application, after which MEP initiated a 10 day consultation period in accordance with the green securities policy.  During that period six environmental NGOs including Greenpeace China sent a letter to MEP voicing concerns over the company’s history of breaching environmental laws and deforestation. MEP responded that it would carefully consider these concerns. In the meantime investigative research by Greenpeace China found that a Gold East subsidiary was in breach of pollution laws.  The evidence was subsequently submitted by the NGOs to MEP along with a request not to approve the IPO. In March 2009, MEP re-opened the public consultation period for the IPO.  According to Greenpeace, this was the longest environmental review since the Green IPO policy was implemented. MEP issued a circular detailing its investigations, taking into account the NGOs concerns – for the first time acknowledging the activity of the NGOs. To date Gold East has not listed.

China’s listed companies rated on sustainability

So, how China’s listed companies rate on sustainability?  In September 2010, RR issued the findings of its annual Asian Sustainability rating using its ASRTM tool. Developed with CSR Asia, the tool examines publically available information of the leading listed companies (in 2010 this amounted to 542) in ten Asian countries, providing investors, companies and other stakeholders with a view of strategic sustainability of these companies. The rating tool relies on 100 indicators covering all areas of sustainability. The results for 2010 revealed that despite leading in terms of numbers of companies reviewed and market capitalization, China was  a laggard with the lowest overall score.  The full results can be accessed on Responsible Research’s website .

In relation to Hong Kong’s listed companies, environmental performance also appears to have much room for improvement. In March 2010 IPE identified 175 companies listed on HKEx (see CWR website), with environmental infraction records in the mainland, many of which were repeat offenses. In most cases there has been little corresponding disclosure of any such violations in annual reports or corporate websites.