In November 2017, the UN Environment and World Bank Group released the ‘Roadmap for a Sustainable Financial System’, in which the authors noted that “sustainable growth will be one of the greatest challenges of the 21st century” and that “the full potential of the financial system needs to be harnessed to serve as an engine in the global economy’s transition toward sustainable development”.
The recognition of both the size of the challenge and the role of the financial system in addressing it, has resulted in the emergence of a range of private sector initiatives, national policies, regulatory interventions and international programmes.
The World Federation of Exchanges (WFE) has engaged proactively on the topic of sustainability since the inception of its Sustainability Working Group (SWG) in 2014. Since that time, the group has produced a number of market-leading research reports on the topic of sustainable finance including five annual WFE sustainability surveys; the WFE’s ‘ESG Guidance’ in 2015 and 2018; and the WFE’s five ‘Sustainability Principles’ (the Principles), which were launched in October 2018.
These Principles constitute a formal declaration by the WFE and its membership to take on a leadership role in promoting the sustainable finance agenda, recognising that exchanges – as a central point of contact for issuers, investors and market intermediaries – act as important vectors in the transition to sustainability. Indeed, with the support and guidance of the WFE SWG and other organisations, exchanges are playing an increasingly important role in promoting sustainable development. WFE member exchanges, representing an equity market capitalisation of over $85tn, recognise both their potential impact and responsibility in this regard.
The Principles have identified areas where exchanges can have a real influence in advancing the sustainable finance agenda, as well as providing a baseline for the development of their market-specific initiatives. The Principles also clearly demonstrate that WFE members – while recognising they are at different stages of market development, with different opportunities and constraints – will seek to promote the Principles progressively in accordance with their circumstances and priorities.
The WFE’s five Sustainability Principles
– Exchanges will work to educate participants in the exchange ecosystem about the importance of sustainability issues – This education (capacity building) is designed to build an understanding and appreciation of the impact of ESG issues on the long-term health and performance of financial markets, and the important role that markets can play in enabling a transition to a more just and sustainable world. Capacity building may be done independently or in collaboration with third parties, and may take the form of seminars, courses, case-studies, information sharing among market participants, and the publication of research.
– Exchanges will promote the enhanced availability of investor relevant, decision-useful ESG information – This could include issuing disclosure guidance to assist issuers, and organising information-sharing/training sessions for issuers around ESG reporting. Exchanges may implement disclosure requirements in phases, beginning with voluntary disclosure, and moving to mandatory/comply or explain disclosure. To ensure the quality of the disclosure, exchanges should encourage disclosure in accordance with widely accepted international standards and against science-based indicators.
– Exchanges will actively engage with stakeholders to advance the sustainable finance agenda – This could range from engagement with regulators and policymakers to promote the creation of the necessary enabling environment, to contributing to the development of consensus around a sustainability taxonomy, and collaborating with other market participants to develop products that advance the sustainable finance agenda.
– Exchanges will provide markets and products that support the scaling-up of sustainable finance and reorientation of financial flows – Exchanges can contribute to the mobilisation and reorientation of sustainable finance by, for example, creating frameworks for the listing of green, social and sustainability bonds; developing sustainability indices; and working with third parties to develop sustainability ratings.
– Exchanges will establish effective internal governance and operational processes and policies to support their sustainability efforts – Exchanges commit to taking steps to better embed sustainability into their governance, strategy and organisational structures, to support the shift into a more sustainable financial system. This could include: incorporating ESG disclosure into an exchange’s own sustainability reporting; educating staff about sustainability risks and opportunities; and establishing board and senior management oversight of an exchange’s own management of ESG risks and opportunities.
The WFE plans to continue to act as a platform to promote and track member engagement on sustainability issues and the development of best practice, as well as encouraging bilateral and multilateral cooperation across the financial industry.
Through these five core Principles, the WFE, along with its members, will be able to foster and promote the development of a sustainable financial system, making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development, while promoting the transition towards an inclusive and sustainable economy.