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WFE Annual Sustainability Survey (April 2019)

The WFE published the results of its fifth annual Sustainability Survey for the 2018 calendar year. The WFE sustainability survey captures the nature and extent of member engagement with Environment, Social and Governance (ESG) issues in both developed and emerging markets. By carrying out this survey on an annual basis, the WFE is also able to track the evolution of members’ engagement with ESG issues. Key highlights of the survey include: •Nearly all exchanges (90%) reported having some form of ESG initiative, an increase on 2017’s 88%. •Many exchanges looked at the UN Sustainable Development Goals - 73% of exchanges with some form of ESG initiative reported having UN SDG-specific initiatives, with education and information programmes for listed companies on the SDGs being the most common. •Exchanges continue to be the primary drivers of ESG disclosure in markets where reporting is encouraged or required, with 77% of exchanges fulfilling this function. •Although two thirds of responding exchanges encourage or require ESG disclosure, there is still no consistent global standard for ESG reporting. •While there appears to be growing investor demand for ESG disclosure, the level of this demand is still considered to be limited in many markets. •Sustainability indices remain the most commonly offered products, but there has been considerable growth in ESG-related bond offerings, with 73% of exchanges with sustainability products offering green bonds in their markets.
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  • 1. WFE Sustainability Survey April 2019 Exchanges Advancing Sustainable Finance
  • 2. 2 Contents 1. Executive Summary 3 2. Introduction 4 3. Methodology 5 4. Survey Results and Discussions 6 4.1 Exchanges and Sustainability 6 4.2 UN Sustainable Development Goals 12 4.3 Transparency and Reporting 13 4.4 Sustainability Products 17 5. Concluding Remarks 19 Annex 1: Survey Respondents 20 Annex 2: Additional Responses 21 Annex 3: Survey Questionnaire 22
  • 3. 3 1.Executive Summary The Sustainability Survey 2018 is the fifth survey by the World Federation of Exchanges (WFE) that captures the nature and extent of WFE member engagement with Environment, Social and Governance (ESG) issues in both developed and emerging markets. ESG is a core strategic mandate and principle of the WFE and this year’s survey mapped exchange activities to the WFE’s Sustainability Principles for the first time. This year’s survey also expanded the section on the United Nations Sustainable Development Goals (UN SDGs) to examine how exchanges are engaging with these targets. Key highlights of the survey include: • Nearly all responding exchanges (90%) reported having some form of ESG initiative, an increase on 2017’s 88% (14 more exchanges in absolute terms). • Many exchanges recognised the UN Sustainable Development Goals - 73% of responding exchanges with some form of ESG initiative reported having UN SDG-specific initiatives, with education and information programmes for listed companies on the SDGs being the most common. • Exchanges continue to be the primary drivers of ESG disclosure in markets where reporting is encouraged or required, with 77% of responding exchanges fulfilling this function. • Although two thirds of responding exchanges encourage or require ESG disclosure, there is still no consistent global standard for ESG reporting. • While there appears to be growing investor demand for ESG disclosure, the level of this demand is still considered to be limited in many markets. • Sustainability indices remain the most commonly offered products, but there has been considerable growth in ESG-related bond offerings, with 73% of exchanges with sustainability products offering green bonds in their markets. The WFE Sustainability Surveys have consistently reported growing engagement with ESG issues among the WFE membership. Exchanges are active in embedding sustainability within the exchange, promoting ESG disclosure among their listed companies and providing markets and products that support the development of sustainable finance.
  • 4. 4 2. Introduction Sustainability is becoming ever more mainstream in the world of finance following the growing focus on these issues by policy makers and businesses alike. We note concerted efforts from both the private and the public sectors to push forward environment, social and governance (ESG) initiatives with the objective of ensuring more sustainable business practices and enabling the transition to a more sustainable economic and financial system. Some of the major developments in 2018 include: • The publication in October 2018 by the Intergovernmental Panel on Climate Change (IPCC) of the Special Report on Global Warming of 1.5°C 1 . The IPCC advised that to limit global warming to 1.5°C and to ensure a more sustainable and equitable society, rapid and far-reaching transitions in land, energy, industry, buildings, transport and cities would be required. • The establishment of the Technical Expert Group (TEG) on Sustainable Finance in June 2018 to assist the European Commission in its Action Plan on Financing Sustainable Growth. One key deliverable of the TEG is an EU taxonomy to guide and foster investment in environmentally sustainable activities. The TEG is aiming to produce the taxonomy report by the first half of 20192 . • The continued rapid growth and expansion in ESG-related bond offerings across markets. As at end-2018, the World Bank green bond programme had reached US$13 billion of issuances3 . The Bank also priced a landmark EUR inflation index-linked sustainable development bond. Earlier in 2018, the International Finance Corporation and Amundi jointly launched the Amundi Planet Emerging One, the world’s largest targeted green bond fund which closed at US$1.4 billion. More stock exchanges are looking into ESG bond offerings. For example, the Santiago Exchange launched its new Green and Social Bond segment. The Buenos Aires Stock Exchange is also working on the development of a green bond market. In October 2018 the WFE published its Sustainability Principles. This marks an important development that demonstrates the WFE member exchanges’ commitment to fostering and promoting the development of the sustainable finance agenda. The Principles also serve as guidance for WFE member exchanges to develop their own market-specific ESG initiatives. The record number of responses (83% of WFE members) to this year’s survey reflects exchanges’ strong support for sustainability. This report tracks trends of WFE members’ ESG efforts, demonstrates how exchanges advance the Sustainability Principles by embedding sustainability in the exchanges’ businesses, driving the promotion of quality ESG disclosure and offering sustainability-linked products. 1 https://www.ipcc.ch/sr15/. 2 https://ec.europa.eu/info/publications/sustainable-finance-technical-expert-group_en. 3 http://www.worldbank.org/en/news/press-release/2018/11/13/world-bank-marks-10-year-green-bond-anniversary-with-landmark-issuance-us-1-2-billion- issuances-bring-world-bank-green-bond-program-to-us-12-6-billion.
  • 5. 5 3. Methodology The WFE’s fifth annual sustainability survey aims to capture the nature and extent of member engagement with ESG issues and how this has evolved over time. A questionnaire was sent to all WFE member exchanges. This year the survey was also extended to WFE affiliates4 for the first time. Responses were collated through an online survey tool. The survey was conducted in early 2019 with responses referring to the 2018 calendar year. The survey questionnaire differed from previous years in the following ways: • Where necessary, questions and options were rephrased or revised to reduce ambiguity, provide comprehensive options to respondents and ensure responses were comparable; • Some questions that were no longer valid or useful were removed; • New questions on the UN Sustainable Development Goals (SDGs) and specific ESG products offered by the exchanges were added to collect more detailed information in these two areas. Respondents were directed to different questions depending on their answers and some questions were skipped by respondents, hence response rates for different questions vary. The total number of responses are noted throughout. Derivatives-only exchanges were given a scaled-back version of the questionnaire as some questions were not relevant for them, for example, questions concerning disclosure requirements for listed companies. Except in instances where we believed a response was incorrect and the correct answer was confirmed with the exchange, or where a respondent selected an ‘other’ option which aligned with one of the existing, pre-defined categories, responses were used exactly as received. We received a record-number of responses this year. In total, 63 exchanges5 participated in the survey, of which 57 (out of 63) are WFE members and six are WFE affiliates. Of the 57 WFE member respondents, five are derivatives-only exchanges. This year’s WFE member response rate equates to an 83% overall response rate6 , up from 74% (49/66) in 2017. Three exchanges participated in the survey this year for the first time and three exchanges that responded to the last survey did not respond this year. Figure 1: Respondents Profile 4 WFE affiliates are Exchanges or CCPs/CSDs that are: significant in their market of operation; whose regulator is a member of IOSCO; and that intend to become members in due course. Many newer, smaller, regulated exchanges choose to become affiliate markets. The WFE requires that the regulatory authority of the applicant is a member of IOSCO. Affiliate status does not automatically imply fulfilment of WFE membership criteria and, unlike membership, is not subject to peer review. 5 The full list of respondent exchanges can be found in Annex 1. 6 57/69, excluding participating affiliates. 44 52 5 5 5 1 0 10 20 30 40 50 60 70 2017 2018 WFE members: Stock exchanges WFE members: Derivatives-only exchanges Affilates: Stock exchanges Affiliates: Derivatives-only exchanges
  • 6. 6 4. Survey Results and Discussions 4.1 Exchanges and Sustainability Exchanges Expanding their Sustainability Efforts In 2018, 90% (57/63) of the responding exchanges said they had some form of ESG initiative, slightly up from 88% last year (14 more exchanges in absolute terms). They reported a variety of ESG interventions targeting both external (regulators, issuers, investors) and internal (staff and management) stakeholders. Regarding the nature of the initiatives, “have made a formal commitment to sustainability” topped the list again this year (70% of responding exchanges, 44/63). “Run ESG capacity building events/engagements for issuers and/or investors”, “engage stakeholders to advance the sustainable finance agenda” and “have a dedicated person/team to oversee the exchange’s sustainability initiatives” followed with similar counts (see figure below). Other ESG initiatives reported, but not listed, include collaborating with external organisations (e.g. GRI, SASB, United Nations) and producing corporate governance ratings for all listed companies. Figure 2: Exchange's ESG Initiatives* *multiple answers allowed 44 39 38 38 36 33 32 22 10 8 5 3 2 2 1 2 1 1 Have made a formal commitment to sustainability Run ESG capacity building events/engagements for issuers and/or investors Engage stakeholders to advance the sustainable finance agenda Have a dedicated person/ team to oversee the exchange’s sustainability initiatives Publish the exchange's own sustainability report or include sustainability info in the annual report Offer sustainability-related products Have issued formal ESG reporting guidance for listed companies Run ESG capacity building initiatives for the Board/staff of the exchange Have formally endorsed/supported the recommendations of TCFD Other (please specify) Not involved in sustainability initiatives Number of responses Stock Exchanges Derivatives/Commodity Exchanges N=63
  • 7. 7 Sustainability Initiatives: Motivations and Concerns Sustainability Concerns Continue to be the Main Driver The motivations of exchanges for engaging in sustainability follows similar patterns to that of the previous years. “Sustainability concerns” (86% of the exchanges with initiatives), “reputation/public relations” (74%) and “expanded business opportunities for the exchange” (68%) remained the top three motivations in the same order. Close to 60% of the responding exchanges with initiatives reported “desire to demonstrate leadership” as their motivation for sustainability involvement. Eighteen percent of the exchanges said their sustainability involvement was also required by a regulator or the law. Figure 3: Motivations for Sustainability Involvement* *multiple answers allowed Regarding concerns about current and possible future sustainability efforts, “business or economic concerns” (46%, 29/63 of responding exchanges) overtook “lack of resources to implement initiatives” (44%) and “insufficient demand” (35%) as the most frequently reported concerns. Other concerns include lack of cohesive effort amongst key stakeholders in the ecosystem, lack of engagement by the regulator, lack of interest from the local market and lack of consensus on ESG reporting and metrics. Eleven exchanges (18%) said they have no particular concerns about carrying out their sustainability efforts. Among the exchanges that responded to the question on concerns about their sustainability efforts both this year and last year7 , 42% (15/36) reported the same number of concerns as last year, while 11 exchanges reported more items of concern. The most frequently reported additional concerns were “business and economic concerns” (6 exchanges), “insufficient demand” (4 exchanges) and “lack of resources to implement initiatives” (4 exchanges). Six exchanges that said they had no concerns about their sustainability efforts in the last survey, reported some concerns this year. Ten exchanges reported fewer items of concern this year. Six exchanges went from having some concerns in the previous year to having no particular concerns about their sustainability efforts this year. 7 36 exchanges in total as some exchanges skipped this question in either or both years. 49 42 39 36 33 32 15 12 10 2 Sustainability concerns Reputation/public relations Expanded business opportunities for the exchange Desire to improve stakeholder relationships Desire to demonstrate leadership Stakeholder requirements or concerns Investor pressure Peer pressure Required by regulator/law Other (please specify) Number of Responses N=57
  • 8. 8 Ninety percent (9/10) of the exchanges that reported fewer areas of concern compared to last year are from emerging markets, though emerging markets also account for just over half (6/11) of the exchanges that reported more areas of concerns. Figure 4: Concerns About Sustainability Efforts* *multiple answers allowed 28 27 22 19 11 7 4 3 3 1 1 2 1 Business or economic concerns Lack of resources to implement initiatives Insufficient demand Competitive concerns No concern in particular Exceeding scope of authority Lack of support from the Board of Directors Lack of employees' understanding Other (please specify) Have ESG Initiatives No ESG Initiatives N=62Number of responses
  • 9. 9 ESG Factors in Exchanges’ Reporting The proportion of responding exchanges that publish their own sustainability report or include ESG information in their annual report remained at a similar level to last year (marginally up from 57% to 60%). However, in absolute terms, 13 more exchanges than last year said they were producing sustainability reports. Further, the range of ESG topics that is covered in exchanges’ reporting has increased. “Risk management” (87% coverage, up from 79% in 2017) overtook “board composition” (82% coverage, up from 79%) and “diversity” (76% coverage, up from 75%) as the most reported ESG factors. Sixteen exchanges (42% of exchanges with ESG reporting) also included the UN SDGs in their own reporting. Figure 5: ESG Factors Reported by Exchanges* *multiple answers allowed 33 31 29 28 28 27 26 24 16 16 15 14 4 Risk management Board composition and remuneration Diversity Health and safety Labour standards and human rights Environmental impacts (air, water, waste) Ethics and anti-corruption Business continuity Potential impacts of ESG factors on businesses UN Sustainable Development Goals (SDGs) Supply chain Mitigation measures for potential negative environmental impacts Other (please specify) N=38Number of responses
  • 10. 10 Promoting the WFE Sustainability Principles The Sustainability Principles set out the ways in which WFE member exchanges will seek to promote sustainability in their markets. Exchanges are at different stages of market development and have their own strengths and constraints, so the WFE understands that not all exchanges are in a position to realise all the Sustainability Principles at the same time. By mapping the reported sustainability initiatives in the survey to the Principles, we can track exchanges’ level of engagement with the Principles and examine progress over time. Table 1: Sustainability Principles and Exchanges’ Corresponding Sustainability Initiatives8 Sustainability Principles Corresponding Initiatives Principle 1: Educate market participants about sustainability issues • Run ESG capacity building events/engagements for issuers and/or investors. Principle 2: Promote the enhanced availability of ESG information • Have issued formal ESG reporting guidance for listed companies; • Have formally endorsed/supported the recommendations of Task Force on Climate- related Financial Disclosures (TCFD). Principle 3: Engage stakeholders to advance the sustainable finance agenda • Engage stakeholders (regulators, policy makers and capital market participants) to advance the sustainable finance agenda. Principle 4: Provide markets and products that support the development of sustainable finance • Offer sustainability-related products (e.g. green bonds, specialised listing categories, ESG Index or related indices or ratings, carbon trading platform). Principle 5: Embed sustainability into the exchange's governance, strategy and organisation structures • Publish the exchange's own sustainability report or include sustainability information in the annual report; • Have made a formal commitment to sustainability e.g. SSE, UNPRI, UNGC, UN SDGs; • Have a dedicated person/ team to oversee the exchange’s sustainability initiatives; • Run ESG capacity building initiatives for the Board/staff of the exchange. All the Sustainability Principles had at least a 60% engagement rate among the responding exchanges. The area of highest engagement is “Principle 5: Embedding sustainability into the exchange’s governance, strategy and organisation structures” (though admittedly, this also had more options to demonstrate engagement). Close to 90% (50/57) of the exchanges with sustainability initiatives had some form of initiative that promotes this principle. 8 Other initiatives not listed in the survey but reported by exchanges were sorted into relevant principles.
  • 11. 11 Among the 40 exchanges that had a dedicated team/person to oversee sustainability initiatives, in 16 exchanges, the person/team reported directly to the CEO, and in seven exchanges, directly to the Board of Directors. This reflects that sustainability receives attention from the top management of many exchanges. “Principle 2: Engage stakeholders to advance the sustainable finance agenda” followed with 72% (41/57) of the responding exchanges having initiatives to promote this principle. In the free form responses, some exchanges said that support from stakeholders, particularly regulators and governments, was important to further advance the sustainability agenda. Figure 6: Realising the Sustainability Principles 60% 61% 68% 72% 88% P4: Provide markets and products that support the development of sustainable finance P2: Promote the enhanced availability of ESG information P1: Educuate market paricipants about sustainability issues P3: Engage stakeholders to advance the sustainable finance agenda P5: Embed sustainability into the exchange's governance, strategy and organisation structures N=57
  • 12. 12 4.2 UN Sustainable Development Goals In this year’s survey we expanded the section on the UN SDGs to examine how exchanges are engaging with these targets. Seventy-three percent (38/52) of the exchanges with ESG initiatives had some form of SDG-specific initiatives. “Education/information programmes for listed companies on the SDGs” were the most reported initiatives. Half of the exchanges9 with formal ESG reporting guidance for listed companies also included disclosure guidance on the SDGs, up from 37% in 2017. Close to half (16/38) of the exchanges with SDG-specific initiatives offered SDG-related products, most commonly green bonds (8 exchanges) and ESG indices (7 exchanges). In addition to these types of products, exchanges also cited emission allowances, Capital Development Certificates10 , savings bonds for financial inclusiveness and charity funds as SDG-related products offered by the exchange. Other SDG-specific activities include internal employee training and the UN’s Ring the Bell for Gender Equality, which is organised annually as part of
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