Jos Dijsselhof, CEO of SIX Group AG, shares his views on the role exchanges can play in ESG, raising capital, DeFI and building an infrastructure for digital assets. Dijsselhof also is chairman of the WFE Working Committee.
ESG (Environmental, Social, and Governance) is the acronym of the hour. What role can the traditional stock exchanges play in terms of sustainability?
The driving force regarding ESG is, of course, the local regulations such as the EU taxonomy. What we as stock exchanges can do first and foremost is to create transparency. We can give ESG criteria more visibility with filter options or indices and offer platforms for the reallocation of capital. SIX for example, with its exchanges in Switzerland and Spain – both members of the UN Sustainable Stock Exchange Initiative – offers listing and trading venues for green bonds, the proceeds of which are used to finance climate projects. Especially on the Spanish stock exchange, the number of green bonds continues to grow steadily, reaching a volume of 12.7 billion Euro by the end of 2021.
On SIX Swiss Exchange, issuers can opt voluntarily for the preparation of sustainability reports in accordance with internationally recognised standards. In the end, however, it is always the market that determines, because the investor has the final decision. Change follows capital. If investors believe in ESG, change is possible. I think there is indeed a a paradigm shift going on. ESG used to be suitable for risk mitigation, now it is also understood as a yield factor.
With regard to the primary markets, we must be aware that no company will decide to be listed on one or the other trading venue for ESG reasons alone. However, if we see ourselves not only as stock exchanges, but also as companies that create value in a more general sense, this should not prevent us from assuming responsibility towards the economy, society and the environment. For example, we at SIX are making efforts to reduce our carbon footprint, ensure cybersecurity, promote diversity and inclusion, develop leaders and strengthen financial literacy in society.
Raising capital is one of the core functions of a stock exchange. How do you currently experience the antagonism between private and public equity?
One could almost think that private and public equity have moved a little closer together recently. Special purpose acquisition companies, or SPACs for short, promise to make the path to the stock market quicker and easier and could offer private equity investors an additional exit scenario. However, this boom already seems to have cooled down noticeably. In turn, special SME segments on the stock exchanges are opening up public equity for companies that are still growing and are thus classically within the sphere of influence of private equity investors. In 2021, 15 companies chose this route to capital on BME Growth on the Spanish stock exchange alone.
In Switzerland, where the private equity industry has had a record year, we launched Sparks, our new equity segment for SMEs on SIX Swiss Exchange. Small and medium-sized enterprises are the backbone of the Swiss economy, and we are now offering them a tailored market that supports their growth and visibility. Crucially, this is a fully regulated exchange segment – unlike other trading platforms in Europe. Investor protection and full transparency are guaranteed. This means that pension funds and other institutional investors can also invest in SMEs, so we connect fast-growing companies with capital.
However, offering a new segment is not enough for an exchange. Issuers have more far-reaching needs. For the Swiss market, we have therefore also further developed our additional services for SMEs: for example, the Sparks IPO Academy, an exclusive training programme for executives of SMEs with high growth ambitions, or the Stage Programme, which improves visibility through independent research.
How do you see the development regarding Decentralised Finance (DeFi)?
The development of DeFi is closely linked to the fate of cryptocurrencies, which have a very volatile character. This partly explains the rapid growth but also the uncertainties regarding DeFi, especially when it comes to regulation. We can still see shortcomings in terms of verifiability and transparency. In a regulatory grey area, many DeFi protocols currently facilitate the exchange of potentially unregistered securities or funds of unknown origin between anonymous parties.
As long as regulation does not keep pace, market participants are faced with checking for themselves which protocols do not violate the law. However, it seems as if the regulations for securities are slowly but surely making their mark on cryptocurrencies and DeFi. Over time, most coins and tokens will be considered and regulated as securities or as a new form of regulated assets. So it is legitimate to believe that standards will evolve and build corresponding infrastructures and offerings.
Whether and how quickly these standards will apply worldwide is another question. It is often said that digital asset markets are global by nature. This would be due to the distributed ledger technology on which they are built and the smart contracts that govern them. In practice, however, there are many regulatory challenges when it comes to issuing digital assets in one country but offering them for sale to investors from different countries. This is especially true for securities. Securities are highly nationally regulated financial instruments. Of course, there are bilateral agreements and harmonisation efforts, but the development of a global regulatory framework would take a very long time.
With the digital exchange SDX, SIX itself is building an infrastructure that you mentioned. So where does Switzerland stand in terms of regulation?
From a legal and regulatory perspective, Switzerland is an excellent location for building an infrastructure for digital assets. The government and authorities are keen to push forward corresponding laws and regulations. For example, the Federal Council fully enacted the Distributed Ledger Technology Act in mid-2021, which selectively adapts ten existing federal laws.
In September 2021, the Swiss Financial Market Supervisory Authority FINMA also approved the licences required to operate SDX. They have allowed SIX to build a fully integrated infrastructure for trading, settlement and custody of digital assets based on distributed ledger technology in a regulated environment. This globally unique value proposition manifested itself in November 2021 with the first issue of a tokenised bond on SDX.
The Swiss National Bank – which relies on a secure, efficient and sustainable financial market infrastructure – also wants to understand the implications of technological change. Together with the Innovation Hub of the Bank for International Settlements and SIX, it researched in the Helvetia project how a transaction of tokenised assets can be processed on the cash leg. Both the issuance of digital central bank money with the distributed ledger technlogy of SDX and, alternatively, the connection of SDX to the existing Swiss payment system SIC – without any digital central bank money at all – were successfully implemented on an experimental basis in 2021.
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.