The Important Role of Capital Markets in Driving Sustainability

I was recently asked to address the topic of sustainability and the capital markets in front of a large audience in the General Assembly room at the United Nations headquarters in New York. The Global Compact Leaders Summit is an annual event, convened by the UN to bring business leaders, government officials, NGOs, entrepreneurs, and even students into a global conversation around responsible corporate practices -- leveraging our enterprise to do good in the world. This year's summit was specifically focused on the ways that businesses could support the Sustainable Development Goals (SDGs), an ambitious set of global targets covering climate change, social justice, and related issues.

Based on the event and my presentation, I want to share my thoughts about the role that the capital markets—and more specifically the exchange community—has in promoting and driving sustainable, responsible global economic growth.

The financial industry, when managed responsibly and with the long term interests of their clients in mind,  serve as a critical component to building a stable and prosperous economy.  Within the financial industry, the role of the capital markets is to fund and enable good ideas.  We connect companies with investors, we empower entrepreneurship, and ultimately we create the ability for companies to create jobs and wellbeing for their employees.

Growing companies and growing job and wealth creation brings increases in tax revenues, which government can use to improve their nation’s infrastructure and social services.  Economic empowerment in this way creates good long-term outcomes such as social progress, economic prosperity, and political stability.

So what role do exchanges play in this plan?  We believe that exchanges are the trusted engines in the capital markets. We serve as the vital connection between investors, companies (or what we call issuers), and government entities. We also work with other critical stakeholders: broker dealers, the media, trade groups, NGOs, and so on.

We strongly believe that exchanges can be vocal advocates for better markets and corporate practices. 

There already seems to be a strong link between sustainable performance and financial gain. Good environmental, social, and corporate governance (ESG) practices drive many positive outcomes: higher market returns, lower shareholder turnover, and better talent recruitment and retention rates. Compelling studies, from Harvard and elsewhere, suggest that it also lowers the cost of capital.

Stock exchanges can work with investors, companies, and regulators to understand linkages like these and drive best practices. In fact, exchanges have been coming together in unprecedented ways on the sustainability, or ESG, issue. Nasdaq and a small handful of peers began the UN Sustainable Stock Exchanges initiative in 2011, and that project that has now grown to include 75% of all the exchanges on the planet. We founded and chaired the World Federation of Exchanges Sustainability Working group. Together, these projects represent 56 exchanges in 51 different countries, more than 38,000 listed public companies and more than $52 trillion in combined market cap. We all share a sense of mission, to assist investors, regulators, and companies in the enhancement of ESG practices.

But our experience tells us that change comes faster when there is a catalyst to align the interests of competing constituents.   Catalysts drive diverse interests together. Given the considerable societal, economic, and environmental challenges before us, we need to decide which catalysts will drive us together. We know that from experience, government, investors, and the capital markets themselves need to work together in order to create the right catalysts to improve transparency and support corporate best practices. Here are three questions we should be asking as we look to drive further sustainability efforts: 

• Can the governments create effective financial incentives, such as tax incentives, to motivate and reward best practice behavior?

• Can an increasing number of private and public institutional investors create an ever-louder voice by demanding disclosure, best practice standards, and when appropriate, improvements before they are willing to invest their capital?

• Can exchanges contribute by working with investors, companies, and regulators to establish those voluntary and mandatory disclosures and best practices that companies should abide by to gain access to that capital?

We all know, however, even with catalysts, change will take time.  Properly addressing climate change or carbon assets or societal issues will take multiple political cycles—and many of our politicians do not exhibit patience as a virtue. But the capital markets can see past the politics and use the catalysts that are available to work together across the constituents to create new incentives and disclosures to create better ESG practices.