Stock Exchanges and Sustainability

Stock exchanges have historically played an important role in economic growth and development through enabling effective capital allocation. However, exchanges and markets more broadly have changed over time, in structure, interconnectedness and rate of activity. This has happened against a backdrop of growing recognition of the unsustainability of the current economic growth path in both social and environmental terms. Sustainability advocates and others have identified stock exchanges and evolving market structure as both contributors to the problem and a potential partner in the solution. Markets and by extension, the companies listed on exchanges and the investors in those companies, are increasingly short-term in outlook and appear not to value the environmental and social impact of corporate behaviour. This is due to a range of factors including (but not limited to) the lack of disclosure by listed companies of relevant environmental, social and governance information, as well as an evolving market structure and trading behaviour that favours trading above investing. Given that it is increasingly clear that environmental and social issues have an impact on corporate performance, exchanges (or the relevant securities regulators) must require disclosure in the same way that financial disclosure is required. Exchanges also have a role to play in developing sustainability indices, ratings and associated products that are useful to investors as they seek to shift to more sustainable investment. More fundamentally, it is necessary to address some of the challenges posed by new market structures. This requires improving the understanding of how the current and evolving market structure impacts on the core capital raising and allocation function of markets and redefining market quality to reflect this linkage. Markets will not, however, even if optimized for sustainability, solve the sustainability challenge, as they should reflect societal norms and expectations, rather than driving them.