Disclosure Systems and Securities Exchanges--On the World Federation of Exchanges Creation of a Sustainability Working Group and the Proposal to Require Extra Financial Disclosure

 

 (Pix (c) Larry Catá Backer 2014)

I have been considering the power of disclosure as a tool to socialize business entities and others into compliance with emerging social norms (that is to behavior rules that are not transposed into the laws of nation-states necessarily but which have binding effect within social, economic and other communities) (e.g., Backer, Larry Catá, From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations. Georgetown Journal of International Law, Vol. 39:591-653 (2008)).

To that end, it is well known that both state and non-state regulatory systems play an essential role.  (e.g., On the Problem of the State in the State Duty to Protect Human Rights--Fostering National Action Plans as a Means of Refocusing the State Duty on the Business of the State Itself, May 10, 2014).  Among the most important players in the context of structuring markets and business behavior expectations are the securities exchanges vital to the operation of global investment.  The community of exchanges structures its operations and disciplines its members through an organization fo exchanges, the World Federation of Exchanges.  It is self described as "the trade association for the operators of regulated financial exchanges. With more than 60 members from around the globe, the WFE develops and promotes standards in markets, supporting reform in the regulation of OTC derivatives markets, international cooperation and coordination among regulators. WFE exchanges are home to more than 45,000 listed companies."  (WFE, WFE Appoints Nandini Sukumar as New Chief Administrative Officer, May 30, 2014). It thus operates both in the social sphere (as a source of cultural norms) and regulatory sphere (as the source of governance norms and structures) that can substantially affect the way in which enterprises operate and understand themselves. "The WFE is a central reference point for the securities industry, and for exchanges themselves. We offer member guidance in their business strategies, and in the improvement and harmonization of their management practices." (WFE, About Us, What We Do).

This role is particularly significant because of the way it affects the operating cultures of enterprises which seek to trade their securities on these exchanges. Though ostensibly targeting disclosure relating to price (WFE About Us, Mission), the decisions about what must be disclosed, and how and where those disclosures must be made, and to whom, play an enormously important role in the way enterprises approach their operations. Each item of disclosure serves as an ingredient in the pricing calculus for buyers and sellers.  If a matter is to be disclosed, then it it is to serve a role in pricing securities.  If it is not, its role in share pricing is more diffuse. Disclosure, then, and through it securities pricing, then, might serve as a key mode of incorporating human rights sensibilities (and sustainability) more robustly into the operating calculus of enterprises. (generally, Backer, Larry Catá, Global Panopticism: States, Corporations and the Governance Effects of Monitoring Regimes. Indiana Journal of Global Legal Studies, Vol. 15(1):101-148 (2008)). The techniques of societal constitutionalism, then, might be brought to bear, to change the governance universe within which enterprises operate, without the need to undertake a massibe multilateral negotiation that might ultimately lead to the modification fo the domestic legal orders of the states necessary to effect global changes in behavior (Backer, Larry Catá, Transparency Between Norm, Technique and Property in International Law and Governance—The Example of Corporate Disclosure Regimes and Environmental Impacts, Minnesota Journal of International Law Vol. 22:1-70 (2013)).

And so, to that end, perhaps, in March 2014, the "World Federation of Exchanges (WFE) has formed a new sustainability working group at its Working Committee meeting in Mumbai last week. The new Sustainability Working Group is comprised of representatives from a diverse array of global stock exchanges with a mandate to build consensus on the purpose, practicality, and materiality of Environmental, Social, and Governance (ESG) data." (WFE Launches Sustainability Working Group, March 25, 2014).

The WFE and its 60 member exchanges have long engaged the investment and regulatory community on the efficacy of ESG disclosures in this effort, as part of its overall commitment to creating transparency and fairness in the capital markets. This new working group will continue that mission, undertake original research, publicize its findings, promote the debate over ESG issues among the members of WFE and make recommendations to the member exchanges. . . . (WFE Launches Sustainability Working Group, March 25, 2014).

The exchanges that initially committed to paticipate include an interesting global mix (from WFE Launches Sustainability Working Group, March 25, 2014): 

• BM&FBOVESPA
• Borsa Istanbul
• Bursa Malaysia
• CBOE
• CME Group
• Deutsche Börse
The work of the WF• IntercontinentalExchange/NYSE
• Johannesburg Stock Exchange
• NASDAQ OMX
• National Stock Exchange of India
• Shenzhen Stock Exchange.

The work of the Sustainability Working Group appears to have now kicked into higher gear.  In March 2014, Ceres, the Investor Initiative for Sustainable Exchanges submitted an Investor  Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting.  It is focused on corporate sustainability reporting that means to institutionalize, routinize and harmonize sustainability reporting so that it might be used, like current financial reporting, to evaluate companies for purposes of making investment and other pricing related decisions. (on the centrality of routinization, institutionalization and reporting coherence, see, On Moving From Theory to Practice of Corporate Responsibility to Respect Human Rights--Thoughts on the Human Rights Reporting and Assurance Frameworks Initiative (RAFI) Project,  May 18, 2014).  Sustainability (also denominated "ESG") is understood broadly to encompass "disclosures involving communities, human rights, resource inputs and outputs, climate change, discrimination and diversity issues, labor rights and employee relations, safety product integrity and privacy, supply chain and sub-contracting ethics, governance oversight pertaining to these categories and related issues." (Investor  Listing Standards Proposal, supra, p. 3).

The Proposed Listing Standard (Investor  Listing Standards Proposal, supra, Section II, pp. 8-14)) is as broad as the categories it means to subsume within its disclosure regimes. But there is a resonance with RAFI (the Human Rights Reporting and Assurance Framework Initiative) (discussed in On Moving From Theory to Practice of Corporate Responsibility to Respect Human Rights, supra). It has three parts.  The first requires thew preparation of an "ESG Materiality Assessment" (Investor  Listing Standards Proposal, supra, p. 8-10). The second requires disclosure on each of ten (10) categories of ESG categories, using a comply or explain approach. Disclosures are to include qualitative and quantitative markers, with reference to policies, procedures, management systems and related corporate initiatives, with existing performance data, discussion of legal proceedings and anticipated controversies and strategic opportunities (Investor  Listing Standards Proposal, supra, pp. 10-12).  The third requires preparation of an ESG performance index.  utilizing the Global Content Index or equivalent (Investor  Listing Standards Proposal, supra, pp. 12-14).

The Investor Listing Proposal is broad.  It is likely to receive some substantial push back from business, and there may be some resort, by the largest companies potentially affected, to enlist the aid of home states in an effort to derail this specific project. This tactic ha sbeen used before, and quite effectively to beat back proposals of this sort. (e.g., Backer, Larry Catá, Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law. Columbia Human Rights Law Review, Vol. 37:287-389 (2006).

Enter the U.N. Global Compact. The UNGC reported on this effort to have the WFE adopt a proposal requiring extra financial disclosure for WFE listed companies. The UNGC is now looking to gather business input on the draft submission. The UNGC press release follows:

Global Compact Invites Business Comment on Stock Exchange Proposal

(22 May 2014, New York) – Institutional investors have put forth a proposal to the World Federation of Exchanges (WFE) – a trade association of 62 publicly regulated stock, futures and options exchanges – that would require extra-financial disclosure among companies listed on member exchanges. The UN Global Compact is gathering business input on the draft submission to share with the WFE's Sustainability Working Group.

The WFE Sustainability Working Group is expected to consider company views alongside those of member exchanges in its deliberations, and to present its recommendations before the plenary at the WFE Annual Meeting in October 2014.

Publicly listed Global Compact business participants are invited to share their opinions on the draft submission by 27 June 2014. Companies should consider including colleagues from relevant internal teams to make a comprehensive evaluation (e.g., sustainability, investor relations, finance). Click here to participate.

As the sole channel for listed companies to make their voices heard by the WFE, the Global Compact encourages business participants who have a stake in the WFE's decisions to avail themselves of this opportunity to influence the negotiations process.

The UNGC Call for Comments follows:

Call for Comments: World Federation of Exchanges Proposed Extra-Financial Reporting Requirements

Institutional investors have put forth a proposal to the World Federation of Exchanges (WFE) – a trade association of 62 publicly regulated stock, futures and options exchanges – that would require extra-financial disclosure among companies listed on member exchanges. The Global Compact is gathering business input on the draft proposal to share with the WFE's Sustainability Working Group. Please listen to this recording for further details.

Publicly listed Global Compact business participants are invited to share their opinions on the proposal by 27 June 2014. Please follow the procedure outlined here:

Steps
Read Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting
Review Global Compact feedback form to proposal
Add your comments to the last column of the form for each row.
Convey your comments in one of the following ways:
Submit electronically to listingstandards@unglobalcompact.org
Provide over the phone – write to listingstandards@unglobalcompact.org to schedule a call

*Business participants who wish to comment should provide the Global Compact with their ticker symbol(s).
 

While it is critically important for business to participate, it may be as important elements of civil society and others to make their views known.  If working through the UNGP is impossible because of the limited scope of their consultation, then it might be useful to  send views directly to the  WEF Sustainability Working Group.  Alternatively, it may be that the U.N. Working Group on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises may provide a facility for consultation as well. Telephone: +41 22 917 9656; Mail:  civilsociety@ohchr.org