What about Principle 6?

Published by: Robert Scharfe, Chief Executive Officer, Luxembourg Stock Exchange Oct 2019

Last year, the World Federation of Exchanges (WFE) established its five Sustainability Principles, and further cemented the shared commitment of its members to driving the sustainable finance agenda. Far from being empty words, these Principles have set a new industry standard that encourages exchanges to challenge themselves and accelerate their sustainability efforts both internally and externally. But where do we go from now?

The role of exchanges

Exchanges across the world have a crucial role to play in the transition towards a greener and more inclusive economy. As providers of stable and transparent market infrastructure, we can choose to drive sustainable development forward actively, or alternatively take a passive position and wait for the market to indicate the course to follow. The Sustainability Principles can certainly serve as a compass in this process.

The WFE'S Sustainability Principle 5 covers internal governance and operational processes, and looks at how exchanges embed sustainability into their business operations and decision-making processes. While Sustainability Principles 1 - 4 address the external role and activities of exchanges, Principle 5 takes an inward look into the internal workings of exchange institutions. One can argue that this makes Principle 5 the most important and urgent principle of all.

To put it simply, the other Sustainability Principles establish the role exchanges should play in educating market participants on sustainability matters, facilitating access to ESG data for investors, providing sustainable finance products and, through these and other actions, advancing the overall sustainable finance agenda.

But without making Principle 5 a priority, without embedding sustainability into our own operations and business strategies, can we promote sustainability in a credible way in the market? As exchanges, we need to be role models when it comes to sustainability and practice what we preach. Many exchanges, including the Luxembourg Stock Exchange, have made it mandatory for listed companies to report on their sustainability commitments and efforts. Should we not apply the same standards to our own organisations?

It all comes down to how we see the role of exchanges in today’s economy and in society at large. Is our role limited to providing a well-functioning infrastructure for financial markets to operate efficiently, or do we have a broader mission? Can exchanges contribute to accelerating the necessary shift from short-term profit to long-term, sustainable growth across financial markets? And more importantly, as an industry, are we ready to assume a broader societal responsibility?

Sustainable tailwind

Exchanges have an important role to play in educating and helping issuers, companies, investors, asset managers and other market participants to fully embrace sustainability. Thanks to the United Nations Sustainable Stock Exchanges initiative (SSE) and the work of its 90 partner exchanges, exchanges have an excellent forum for the sharing of best practises and the establishment of advanced industry standards in the field of sustainability, not to mention an environment of healthy and constructive peer pressure.

The SSE was established with the goal of enhancing performance of ESG issues and encouraging sustainable investing and the financing of the UN sustainable development goals. The numbers speak for themselves: in 2018, SSE and WFE published an impressive progress report that suggests that exchanges have made tremendous efforts over the past few years when it comes to their commitment to sustainability. More and more exchanges publish ESG Guidelines for their clients, organise ESG training and provide ESG indexes in their markets. Increasingly, exchanges also publish their own sustainability reports.

A lot of work has been done already, and earlier this Fall SSE and WFE published a blueprint for how exchanges can embed sustainability within their operations, providing a methodology and a clear action plan for further progress, customised to exchanges.

But despite these efforts, we are only at the beginning of our joint sustainability journey. Our guidance and educational efforts are showing positive results, and great initiatives are being implemented. We can be proud of what we have achieved so far. However, if we believe that more needs to be done, and done faster, then we need to move beyond offering positive incentives and rather apply a more direct pressure on our clients in the form of mandatory requirements. The role of exchanges will certainly evolve in the coming decade, and the time might be ripe to get to the next level.

So let me go back to my initial question – what do you think about Principle 6?