Developing climate resilient stock markets

The Climate Disclosure Standards Board’s (CDSB) report, proposing corporate climate change reporting requirements for adoption or support by stock exchanges, is designed to encourage the supply and use of information to strengthen the resilience of markets against climate change disruption.

Vienna Stock Exchange

CDSB’s report Climate resilient stock markets considers why stock exchanges should act to address climate change, the current state of activity on climate change reporting and the challenges and opportunities for stock exchanges wishing to introduce or develop climate change reporting approaches. The report draws on the experience and research of organizations that have already considered the role of stock exchanges in addressing climate change and wider sustainability, including ACCA, Aviva Investors, CDP, Ceres, Corporate Knights Capital, EIRIS and UNCTAD.

Maintaining trust and resilience in times of change

Climate resilience, that is the capacity to survive disturbances brought about by climate change, depends on structures being in place to identify and mitigate risk. Stock exchanges play a significant role in identifying and reducing risk, thereby protecting the integrity of and trust in financial markets. 

The risks presented by climate change share many characteristics with the risks associated with the financial crisis and corporate governance irregularities in relation to which stock exchanges have already made meaningful interventions. Climate change risks are imperceptible, creeping and systemic in nature and lead to widespread destruction of value and harm to the public interest. 

Future climate risks are directly tied to present decisions, including the way in which capital is invested and regulated. Decisions made now will affect the scope and scale of climate impacts. Robust information about climate change is therefore needed now for integration into decision-making. Indeed there is significant investor agreement that climate change warrants particular attention in corporate disclosure, because of the widespread physical and systemic risks it presents and also the innovation opportunities that it offers.

Stock exchanges are uniquely positioned to strengthen economic & climate resilience and security

As repositories for the rights, rules, mechanisms and systems that shape economic relationships, stock exchanges have a powerful role to play in protecting market actors, creating the conditions for clear disclosure and promoting incentives for the development of sustainable practice. Stock exchanges can:

  • Engage and collaborate with companies, investors and others e.g. the UN Sustainable Stock Exchanges initiative and World Federation of Exchanges Sustainability Working Group;
  • Support capacity building and transparency by promoting and sharing best practice;
  • Monitor market developments and bring cases to the attention of securities and regulators; 
  • Support emerging markets and Sustainable Development Goals;
  • Develop guidance, training, tools and methods to enable reporting;
  • Require companies to adopt and implement reporting requirements for non-financial information that includes the assessment of climate risk, policy and strategies.

Much has been done to build capacity in corporate reporting, but the current approach is fragmented

In response to calls from shareholders and regulators, and in support of corporate sustainability, a number of stock exchanges already require or encourage their registrants to disclose material sustainability, environmental and climate change related-information. These include Toronto, Malaysia, Johannesburg, Korea and Bombay exchanges. Stock exchanges are also participating in coalitions and specialist working groups to address climate change and other sustainability related issues. For example, the World Federation of Exchanges Sustainability Working Group convenes regularly to discuss material concerns and share best practices related to sustainability, investigating the need for exchanges to seek, standardize, and publish environmental, social, and corporate governance data.

Although some stock exchanges are engaging in and leading environmental, sustainability and climate change reporting, there are various challenges to be addressed before those actions result in optimal outcomes for stock market actors. Variability in the quality, quantity, type and location of reported climate change related information leads to a lack of consistency and comparability, limiting its use in decision-making.

The proposed requirements on climate change reporting 

To support the role of stock exchanges building market resilience, address the lack of climate change-related information in the market and the fragmented reporting landscape, CDSB has drafted climate change reporting requirements for companies listed on stock exchanges. The proposed requirements adopt and extend relevant reporting structures, principles and language with which business is already familiar, incorporating and exhibiting emerging shared trends in reporting, contextual and explanatory narrative and supporting assurance activity. 

Image source: Roger W/Flickr