The World Federation of Exchanges (WFE), the global industry group for exchanges and central counterparties (CCPs), recently published the findings of its sixth annual sustainability survey, which reveals changes in how its members are engaging with the rising trend of all things Environment, Social and Governance (ESG). In a Q&A, Pedro Gurrola-Perez, head of Research at the WFE, explains the top findings of this survey.
Q. This year the survey again mapped out exchange activities with your previously shared Sustainability Principles. Why is this important?
A. The WFE’s five Sustainability Principles constitute a formal declaration by the WFE and its membership to take on a leadership role in promoting the sustainable finance agenda.
The Principles identify areas where exchanges can have real impact in advancing the sustainable finance agenda, and we have encouraged all exchanges to use these Principles as the baseline for the development of their market-specific initiatives. 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.
Exchanges are at different stages of market development and have their own strengths and constraints, so the WFE understands that not all exchanges are able to realise all the Sustainability Principles at the same time. Nevertheless, compared with 2018, we observed a higher number of exchanges engaged with each of the Principles. The largest increase (25%) being on exchanges promoting the enhanced availability of ESG information (Principle 2).
Q. Looking at the highlights of the survey shared, you say 41% of survey respondents had initiatives corresponding to your 5 Sustainability Principles? Is this figure progress from previous years and what is the significance of this change?
A. The Sustainability Principles were published in October 2018. The first assessment of the engagement with the Principles was published in the WFE Sustainability Survey 2019. At that time, only 38.6% of respondents were engaged with all 5 Principles. While the figures between the 2019 and the 2020 survey are not fully comparable, given that the sample of respondents’ is slightly different, the results still point to progress in the adoption of the Principles.
Q. Green bonds appear to be the standard ESG product currently. Is there another particular ESG product that is standing out in terms of growth and interest?
A. We observed an increase in offerings across all product categories, demonstrating a gradual expansion of ESG products by exchanges. After green bonds, the products most offered are Sustainability Indices, Sustainable/Social bonds and ESG ETFs. We are in the process of collecting more granular ESG-related data be able to also identify growth across other indicators, including trading volumes.
Q. A lack of convergence on ESG standards was highlighted in the survey as a concern amongst some of the participants. How can this divergence of standards be addressed? What are the risks this divergence poses?
A. Ensuring high-quality, comparable ESG disclosure that can serve the best interests of both issuers and investors is indeed one of the biggest challenges facing exchanges.
Divergence of standards makes it difficult to compare across markets and jurisdictions, affecting the confidence of investors and limiting their choices. It increases costs (as additional efforts are needed to compare or switch between instruments) and will ultimately impair the advance of the sustainability agenda.
The WFE is engaging with its members to progress on a consensus for common standards.
Q. ESG is a global trend all market participants (banks and exchanges) are responding to today. How are exchanges using ESG to differentiate themselves?
A. As a central point for issuers, investors and market intermediaries, exchanges are a critical node in the financial ecosystem and therefore have a special responsibility in advancing the ESG agenda across the whole system. They are acting on this — the WFE Principles is partly a roadmap — and are actively engaged in different ESG-related initiatives, through the WFE and across many other global organizations. If we look at drivers of ESG disclosure, for example, it is clear that exchanges are leading on this initiative with 96% of exchanges requiring or encouraging ESG disclosure.
Q. Investor demand for ESG is undoubtedly on the rise and your survey mentioned that exchanges are increasingly seeing an opportunity in ESG through product offering expansions/launches. Can you explain more about the opportunities ESG can provide exchanges?
A. Exchanges have seen the opportunity of entering into a virtuous circle where, by expanding their offering of ESG products and strengthening their ESG credentials, they can add value to the firm, attract investors and issuers which are supportive of the ESG agenda, and modify behaviours across the ecosystem. Which will in turn allow them to progress with their ESG agenda. During the last year, the number of exchanges that are motivated by the opportunities that ESG provides increased by 20%, from 39 to 47.
Q. How do you think the current pandemic will affect sustainable finance amongst your members this year?
A. Exchanges will play an important role in rebuilding the economy. As the economic effects of the pandemic unfold, exchanges also have a role to play in reshaping the economy to advance the sustainability goals. As an industry, we believe that when we rebuild the financial system, we will rebuild it more sustainably. At this time, exchanges are providing markets and products that contribute to sustainable development, they are supporting small and medium enterprises and they are taking steps to offer more even more data and even more transparency. Even while we are in the middle of the greatest crisis any of us has ever experienced, we are optimistic for the future and for the role that our industry will play in contributing to sustainable development.