Contribution of exchanges to economic growth and sustainable development

At this year’s WFE annual meeting the WFE and UNCTAD launched a new joint report on the role of stock exchanges in fostering economic growth and sustainable development, writes James Zhan, Director, Investment and Enterprise, UNCTAD, and Editor-in-Chief, United Nations World Investment Report.

It’s a topic that is receiving renewed importance as world leaders look for ways to leverage private investment to help achieve the United Nations Sustainable Development Goals.

Our objective with this joint report with the WFE is to engage with the critically important question of how stock exchanges can promote economic development and begin to explore how this can be (and is already being) expanded to address some of the twenty-first century’s biggest development challenges.

The report looks at three related dimensions: i) economic theory and the role of exchanges in promoting economy wide growth; ii) the role of exchanges in promoting the growth small and medium size enterprises; and iii) the efforts of exchanges to promote good environmental, social and governance practices among issuers.

The report notes both the positive role of stock markets in promoting economic development, as well as some of the shortcomings and common criticisms of markets.

We conclude that well-functioning exchanges can and do make important contributions to economic growth and sustainable development. They do so through two main mechanisms: the first is promoting good governance in business practices and the second is promoting investment in sustainable development.

Their investment mobilisation efforts foster economic development and innovation at the macro level, but increasingly also help SMEs access finance through dedicated platforms and programmes. Some of these SME efforts go well beyond finance into enterprise development programmes involving a range of managerial capacity building efforts. These are all important functions for creating jobs and raising more people and countries out of poverty.

Exchanges are also active in helping to tackle some of the 21st century’s biggest challenges. Social inequalities and environmental risks pose fundamental threats to the prosperity of all countries. International efforts to address these critical issues lead to the formation of the United Nations Sustainable Development Goals.

These goals, agreed by governments around the world in 2015, lay out the pathway for the future we all want and include targets like: eliminating poverty, achieving gender equality, addressing climate change, and ensuring inclusive and sustainable economic growth.

Achieving these goals is in everyone’s interest. Profitable exchanges, investors and companies rely on sustainable, healthy and prosperous societies. This presents challenges, but also opportunities. Meeting the SDGs will require massive injections of investment. In our 2014 World Investment Report, we estimate that global investment needs are on the order of US$5 to 7 trillion per year, with about US$3.3 to 4.5 trillion per year in developing countries alone. Much of this is for basic infrastructure, food security, health, education and climate change mitigation and adaptation. Stock exchanges can be instrumental in meeting these investment needs and are recognized as an important element in UNCTAD’s Investment Policy Framework for Sustainable Development.

In our joint report with the WFE, we highlight the work of exchanges in helping to enable the mobilisation of capital to address these significant long-term sustainability challenges. The market for green bonds, for example, continues to grow at an exponential rate with a large portion of these instruments traded on exchanges. Green equity indices and other sustainability themed products are also growing in use and sophistication.

Our report also highlights the efforts of exchanges to promote good environmental, social and governance practices amongst listed issuers. Nearly half of the world’s exchanges now provide guidance to issuers on the disclosure of material ESG information.

Given the size of the challenges the world faces, it is critically important to have well-functioning exchanges fit for purpose. This new UNCTAD-WFE paper sets the baseline for future work around policies and processes for maximizing the development contribution of stock exchanges. UNCTAD will continue to support stock exchanges, working with the WFE and through the UN Sustainable Stock Exchanges initiative, to assist exchanges in their endeavors to promote good corporate governance and investment in sustainable development.

You can read the full report here.