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A Social Stock Exchange could provide a market exclusively designed for investors to look at the opportunities provided by social enterprises

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Sustainable stock exchanges: a new choice for investors

Chris Milton

28th December, 2010

Can the cut-throat, speculative world of the stock market be used to hold businesses to account for environmental damage and human rights abuses? Chris Milton investigates for the Ecologist

In November 2009, in a small room at the United Nations in New York, a group of the world’s most powerful financiers gathered to discuss something close to their hearts: stock markets.

However rather than talking about capital driven considerations, such as cash flows and profit maximisation, their focus was on promoting environmental and social considerations as criteria for sound investments.

This is because the meeting was hosted by the United Nations Principles of Responsible Investment (PRI) and most of the meeting’s attendees were signatories to the scheme. Its focus was how signatories could fulfil the third of PRI’s six principles: to seek environmental, social and governance (ESG) disclosure from the companies in which they invest. ESG is the twin of the more widely known Corporate Social Responsibility (CSR). While CSR is the disclosure of information by a company, ESG is the criteria against which investment decisions should be made. The two do not correlate exactly, but they certainly work hand in hand.

Many investors in the Socially Responsible Investment (SRI) community had previously thought CSR disclosure would happen through government regulation, but the meeting believed it had found an alternative: Sustainable Stock Exchanges, where the production of CSR data is part of the exchange’s listing rules, the hurdles a company has to jump over in order to be publically traded.

In September 2010 the group met again, this time in China. A survey of the world’s top 30 stock exchanges was presented, which showed that while only 21 per cent of respondents supported changing their listing rules, over 75 per cent accepted they had some responsibility towards society and the environment. The meeting ended with the initiative’s leader saying it would write to stock exchanges around the world 'to demand that sustainability reporting becomes embedded within listing rules and that listed companies put a forward looking sustainability strategy to vote at their AGM.'

This leader isn’t one of the more recognisable ethical investment companies such as Triodos Bank and the Co-operative Group, who are nevertheless part of the initiative.
It’s Aviva Investors, part of the world’s fifth largest investment company and the largest UK-owned institutional investor. Why is this giant leading attempts to reform the global financial system of which it is such a vital part?

Failure of voluntary approach


Steve Waygood is Head of Sustainability and Investor Research at Aviva Investors and the man writing the letter to the leading stock exchanges. '[Aviva] recognises that sustainability is important and should be integrated into portfolio management,' he explains, 'The question is how to do this in practice?' He lists three possible options: expecting companies to adopt CSR criteria voluntarily, changing company law or changing stock exchange listing rules. 'Voluntarism isn’t working,' he says, citing Aviva Investor’s experience when they wrote to 10,000 of the world’s listed companies to ask them to sign up to the United Nations Global Compact (UNGC), one of the less stringent CSR frameworks.

Only 150 of the 10,000 were prepared to take the step voluntarily, and only 10 per cent of the companies signed up to the UNGC are of interest to institutional investors, the rest being either state or privately owned. Of the other two options, he believes company law is reviewed too infrequently to be useful in the current environment, leaving changing stock exchange listing rules as the only viable solution for institutional investors. 'Aviva Investors would prefer stock exchanges to change their listing rules to include a sustainability strategy from companies to be put forwards at AGMs,' he says, likening the proposed situation to directors’ remuneration reports.

These have to be prepared every year and submitted for approval at the AGM. The vote is only advisory, but it is taken as a severe criticism of a company’s management it the board cannot get shareholders to agree with its overall strategy, as activist shareholders have shown in recent years. Forcing a vote on sustainability at AGMs will stimulate more discussion of sustainability within the boardroom than simply changing company law to make CSR reports mandatory.

Steve Waygood is realistic enough to recognise that this engagement on big markets is not enough to solve all the sustainability issues in the financial world. One reason may be that it excludes social enterprises.

The problems of social enterprises


Social enterprises are companies whose primary aim is to create a positive change in society. As businesses they need to make a profit but they are willing to sacrifice maximised profit in order to ensure the effect on the ground is as far reaching as possible. These businesses traditionally hit a glass ceiling and become disenfranchised from the investment world, according to Pradeep Jethi, a driving force behind the Social Stock Exchange project.

They receive good capital investment when they first launch, he says, because they are in a rapid growth phase and this fits with traditional investors’ aim of creating a large profit within a short space of time. However in later years investors are not so keen on the slower growth rates and the businesses themselves shy away from traditional investors who may ask them to compromise their core mission in order to maximise profits.

The Social Stock Exchange could change this by providing a market exclusively designed for impact investors to look directly at the opportunities provided by social enterprises. 'What differentiates us is that our companies put social justice first,' says Pradeep Jethi, explaining that there would be no need for mandatory CSR listing rules because only socially aware companies would be allowed onto the exchange in the first place. That differentiation could attract big money. Impact investment is a fast growing section of the finance sector and includes names such as JP Morgan whose impact investment fund is currently worth over $41bn.

Pradeep Jethi admits it will be difficult to keep the speculators out of the Social Stock Exchange simply because it’s up to the companies where they accept investment from, not the exchange. 'When a company first IPOs (lists on the exchange) we will advise them to go to impact investors,' he says, 'And one of the things we would like to do is to ask that the share register should be published once or twice a year.'

The hope is that this additional scrutiny will keep away the gambling class of speculators who don’t like the wider world to know which companies they’re betting on.

Human rights a low priority


However reforming stock exchanges can never be a complete solution according to Scott McAusland, Advocacy and Communications Officer for the International Rehabilitation Council for Torture Victims. 'Targets mean investors are committing on these issues,' he says, 'But investors will never be as good as NGOs at holding businesses to account for human rights abuses'. His issue is that human rights is still seen as a very poor cousin of environment issues and has far less emphasis placed upon it by reporting frameworks, companies and investors alike. This is because human rights abuses usually only come to light after a certain length of time has passed. Even where a link to a company is proved access to legal redress for the victim can be impossible without an independent organisation prepared to take action.

Investors are unlikely to be able to take on this role because they’re naturally more concerned with a company’s mitigation and preventative measures than ensuring the victim is receives proper remedy. 'The thinking simply isn’t as well developed,' he says citing the recent example of the Global Reporting Initiative (GRI), another CSR framework, deciding not to update its human rights indicators because the area is just too complicated.

In order to become sustainable, national and global financial systems will therefore need to take account of many factors and just one solution is unlikely to be able to embrace all the changes required. This is neatly summed up by Harry Morrison, General Manager of The Carbon Trust, who points to the difference between reporting upon a company’s operations and taking steps to change them for the better.

He suggests that investors may wish to use carbon as an example of how other impacts should be handled. In particular, he points to how the Carbon Trust has not just engaged with businesses in measuring their carbon footprint but also actively helped them to set targets to reduce it. However even here it appears that there is a mismatch between business expectations and their actions on the ground.  For example, a recent Carbon Trust survey found that three quarters of UK companies expect carbon reporting to become mandatory, yet almost the same number admit they don’t measure their carbon footprint.

Even more tellingly, the survey shows that less than half of the companies cited investor pressure as a reason to cut their carbon emissions, while over three quarters cited consumer expectations.

There is no doubt that sustainability has gained momentum within the financial sector. The volume of UK funds placed under SRI has increased by 19 per cent in the last two years and many markets are reporting that the value of SRI funds is growing faster than the market as a whole. The danger is that once this rapid expansion of SRI and impact investing has tailed off the money will move to the next high growth area.

To stop this happening investors and governments need to have well informed consumers telling them what to do and activist NGOs prepared to keep the pressure up and hold businesses to account. In other words, all stakeholders need to participate together in making CSR and ESG become everyday business and investment practice. Only this wil ensure finance moves to a truly sustainable model.

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