Evan Harvey is the Director of Corporate Responsibility for Nasdaq. He manages all corporate sustainability (environmental, social, and governance strategy), philanthropic, and volunteering efforts. This includes internal management of systems and disclosures as well as external engagement with public companies, institutional investors, advocacy groups, and other stock exchanges. He currently sits on the U.S. Network Board for the United Nations Global Compact and the Advisory Board for the CECP Strategic Investor Initiative. He previously served as the first chairman of the World Federation of Exchanges (WFE) Sustainability Working Group and an Advisory Board Member for the Sustainability Accounting Standards Board (SASB). His work has been published in Forbes and the Sustainable Accounting Review, and he is a regular contributor to Capital Finance International. Evan has worked at Nasdaq since 2004, holds a B.A. and an M.A. from the University of Texas, and lives outside Washington D.C.
Christopher P. Skroupa: How do stock exchanges navigate the space between companies, investors, and regulators?
Evan Harvey: Exchanges that believe in the positive correlation between corporate sustainability performance (specifically related to environmental, social, and governance issues) and financial performance have been increasingly interested in driving better, more insightful data into the marketplace.
As market operators, and stewards of public trust when it comes to a level investment playing field, exchanges use a variety of means to create ESG transparency—and, ultimately, better ESG performance. Some stock exchanges have a listing rule related to ESG disclosure; many others, like Nasdaq, emphasize a program of voluntary participation. We believe that most companies already understand the value of tracking sustainability KPIs internally. This gives the management team and the board long-term insight into the risk and opportunity sides of a business.
The decision to become more transparent about those data points—to tell an investor just how much carbon the company uses, or how it encourages diversity and inclusion in the workplace— often involves a bit more soul searching.
Skroupa: How does ESG disclosure create business, rather than burden companies with additional regulation?
Harvey: Exchanges have quasi-regulatory ties to listed companies already, specifically requiring some governance and economic disclosures, but the push for “non-financial” data is tricky. We are reluctant to overburden companies with regulation that constrains growth or slows the pace of job creation; but we also believe that some disclosure of these metrics is necessary to satisfy the materiality expectations of our investors.
Many exchanges now believe that sustainable business thinking leads to more innovation, more opportunities to create products and services. We already see this happening in the financial product space—just look at the explosion in sustainable instruments like green bonds—but other sectors are following suit.
Many of the smart companies coming to our market are focused on using technology, natively integrating the robust insight that comes from big data analysis. And the emerging entrepreneurial generation is focused on environmental performance, new energy, cleaner performance.
Skroupa: What role is the SEC playing in creating a better corporate reporting process for ESG issues, if any?
Harvey: Until recently, there would have been very little to report. Absent a stronger regulatory push from the SEC, the companies that cared about this were spontaneously (and voluntarily) filling the ESG reporting gap.
But in April of this year, the SEC finally responded. It published a new concept release, a lengthy reconsideration of corporate disclosure protocols, as currently mandated under Regulation S-K. And in the months since, an even more surprising result has emerged. The majority of non-form comment letters received in response (and published on the SEC website) specifically address corporate sustainability disclosure, even though a very small percentage of the concept release content was actually devoted to this topic.
Skroupa: What is the typical engagement process for companies? How do they get involved, and where does it lead?
Harvey: We lead with education and research, putting the data in front of companies so that they can draw their own conclusions. If we say that sustainability performance can drive down your cost of capital, don’t just take our word for it: Here are dozens of academic and analyst models that clearly indicate this is happening.
Companies often come to us out of frustration (“Which frameworks are important? Who needs to know this stuff? Why are there so many inbound requests?”) or fear (“If I do not answer this survey, will my chances at getting that contract be limited? Are activist investors targeting my company?”).
Exchanges have been specifically focused on advising public companies on the efficacy and value of certain ESG metrics—we officially recommend disclosure of 33 of them, as published in a report last year—but eventually this project will move beyond reporting. We still have to audit, verify and normalize this data, because “sustainability reporting” is often relegated to an organizational vertical outside financial reporting. Which means, of course, that the data is not always as dependable or accurate as it could be.
Skroupa: Which part of the ESG spectrum is most important? Where should companies and investors focus their attention?
All of these ESG metrics are important, specifically to certain investors who have an ideological or even algorithmic focus, but we are aware of the need to prioritize. Not every company will be able to measure all of this right away, and many of them will not be ready to publicly disclose.
Savvy investors tell me that the corporate governance metrics are the best long-term indicators of healthy corporate performance. The more proactive a company can be in measuring and publicizing performance in that area, it seems to pay dividends.
Skroupa: How are ESG reporting guidelines and long-term investor expectations connected?
ESG looks at performance across a lengthy time horizon, trending ultimately towards positive results. A quarterly setback would not necessarily undermine the validity of, say, a 5-year carbon reduction plan. And ESG investors tend to bring a long-term perspective to this work, which lowers turnover and creates a better avenue of communication.
Christopher P. Skroupa