IFC and the United Nations Sustainable Stock Exchanges Initiative (SSE) are teaming up with an initiative aimed at strengthening ESG disclosure and reporting requirements for companies in emerging markets—and supporting stock exchanges in these countries as they look to upgrade these requirements. Better disclosure and transparency leads to better business and matches sustainable companies with responsible investors. The overall goal is to help build investor trust, attract capital, and grow strong local capital markets.
Announced at the World Investment Forum in Geneva in October 2018, the partnership brings together IFC’s expertise with the SSE’s network. It will focus on helping local stock exchanges develop ESG disclosure rules that meet specific local needs and enhancing low-risk emerging markets investments solutions.
Initiative aims to fill knowledge and information gaps
Investors in every market are demanding more information about material aspects of company’s strategy, governance and performance as they conduct their investment due diligence—including credible information about companies’ environmental, social, and governance (ESG) practices.
The reason? Disclosure of reliable information enables investors to make more informed decisions and contributes to liquid and efficient markets. And a growing body of evidence demonstrates strong links between robust ESG reporting and better performance: enhanced disclosure helps companies better manage their resources, improve operational efficiency, and gain access to lower-cost capital.
That’s why many stock exchanges and securities market regulators are increasingly active in promoting ESG disclosure and sustainable finance.
But such information is scarce in emerging markets. Stock exchanges and regulators in these markets may lack the knowledge to implement approaches that will improve ESG reporting for listed companies. They may not have sufficient training or resources themselves and thus lack the capacity to provide ESG training for companies or to tailor their specific requirements to local market needs or the country’s level of development. They also may struggle to articulate the business case for ESG disclosure.
It is a real problem, particularly since consistent, comparable and timely disclosure is essential for efficient market functioning. The lack of such reliable information could be getting in the way of market expansion and economic growth in these nations.
The IFC/SSE initiative is designed to fill this significant gap in emerging markets. The work will draw on IFC’s extensive track record of working with emerging market stock exchanges, regulators, and companies on corporate governance and environmental and social improvements. It also will draw on IFC’s recently released Disclosure and Transparency Toolkit for companies, investors, capital market officials and regulators. Since the toolkit’s release in January 2018, it has been used to develop market and regulatory guidance in Kazakhstan, Kenya, Nigeria, Peru, Georgia and the Philippines.
A core component of IFC’s efforts to improve reporting in capital markets, the toolkit also will form the basis for eLearning and online tools that companies can use to start their reporting journey and disclose ESG information that goes beyond the balance sheet.
Stock exchanges and market regulators as agents of change in emerging markets
Stock exchanges are uniquely positioned to improve the quality of sustainability disclosure worldwide, as they interact with investors, companies, and regulators alike. Market regulators also have an influential role in encouraging good corporate governance and transparency, by promoting ESG requirements for companies.
By establishing best ESG disclosure practices for listed companies, these key actors can help strengthen markets, identify growth opportunities, manage risks, drive improvements in business practices, and channel more capital towards sustainable companies in emerging markets.
Pushing for higher standards of ESG disclosure and transparency also can mitigate some of the perceived risks associated with investing in emerging markets, such as weaker corporate governance, heightened social and environmental issues, and concentrated ownership. In turn, this will encourage more investment.
March 2019