KNOWLEDGE AND POWER IN MEASURING THE SUSTAINABLE CORPORATION: STOCK EXCHANGES AS REGULATORS OF ESG FACTORS DISCLOSURE. (environmental, social, and governance)

• Published date: 22 March 2020
• Author: Fornasari, Federico
• Date: 22 March 2020

 I. INTRODUCTION 170
                 II. FROM CSR TO SRI AND ESG INDICATORS: ACRONYMS AND BEYOND 170
                 A. CSR 174
                 B. SRI 182
                 C. ESG Factors Reporting 184
                III. INDICATORS AND INSTITUTIONAL ARCHITECTU[GAMMA]C 184
                 A. Indicators as Technologies of Global Governance 192
                 B. Actors and Roles in the Production of Indicators 192
                 C. Transnational Financial Associations and Global Governance 194
                 IV. THE SSEI: A NEW FRAMEWORD FOR ESG REPORTING 196
                 A. The SSEI: Actors, Reasons, Purposes 199
                 B. The SSEI Model Guidance 199
                 C. A Preliminary Approach 203
                 V. THE WFE INDICATORS 207
                 A. The Role and Functions of the WFE 210
                 B. The WFE's Indicators 210
                 1. The 2015 Indicators 212
                 2. The 2018 Indicators 217
                 C. Stock Exchanges' Implementation 217
                 VI. THE POLITICAL-ECONOMY OF THE SSEI-WFE FRAMEWORK 222
                 A. Harmonization of Information Disclosure 223
                 B. Which Concept of Sustainability 223
                 C. Contesting the Framework? 225
                VII. CONCLUSION 226
                APPENDIX 230
                 1. WFE 2015 Indicators 230
                 2. WFE 2018 Indicators 230
                

I. INTRODUCTION

"Sustainability" surely figures amongst the most discussed themes by corporate lawyers and policymakers at the global level in the last years. As elusive as the concept can be, the sense of urgency surrounding climate change and environmental considerations is clearly the main driver behind this trend. The burgeoning levels of inequality that have contributed to the crisis of representative democracy, not only in the global north, come second. The intention of pulling off from the Paris Agreement by major countries has only intensified the debate around the topic and has offered global investors and corporations an occasion to take a leadership role as main actors in the struggle against climate change.

After the Great Financial Crisis, (1) corporate social responsibility and sustainable investing have become mainstream through the reframing of unsustainable practices as business risks. (2) Therefore, the necessity to provide investors (3) with reliable data and metrics to evaluate these risks (4) has spurred a call for harmonization and standardization in ESG issues reporting focused on financially material factors. (5) In fact, it is widely assessed that the existing voluntary reporting schemes fail in providing investors with decision-useful information. (6) Corporate social responsibility and socially responsible investment have been rebranded as ESG factors considerations and have changed in their substance. The "doing good while doing well" approach (7) has been partially substituted by business risk considerations (8) and investment opportunities linked to ESG issues. Exchanges, (9) investors and financial regulators (10) have called for ESG factors disclosure, rather than NGOs, workers or consumers.

The call for elaborating ESG metrics disclosure has been taken up also by a project developed since 2009 under the aegis of the United Nations. The Sustainable Stock Exchanges Initiative (henceforth, SSEI) aimed expressly to elaborate a model guidance for ESG reporting to investors in collaboration with exchanges around the world and other crucial international business organizations and CSR advocates (UNCTAD, UN Global Compact, UNEPFI, PRI). This model guidance has been complemented with key performance indicators in 2015" by the World Federation of Exchanges (henceforth, WFE), which is the international association of exchanges and represents the "voice of the global market infrastructure." (12) These indicators have been eventually revised in the summer of 2018. (13)

Most of the corporate law and financial economics analysis of sustainability focus on how corporations or investors which take into account ESG issues perform, (14) or how to technically provide meaningful information to investors. (15) At the same time, ESG factors disclosure is deemed a crucial tool that would foster a reallocation of capital towards sustainable corporations. Through these lenses, ESG factors are seen as risks to avoid or business opportunities to exploit. However, these studies do not always delve into the structure and content of the metrics developed to assess sustainability corporate performance.

This paper disentangles ESG factors disclosure from corporate social responsibility and socially responsible investment in order to shed light on the architecture and institutional dynamics of non-financial factors disclosure and their assessment as business risks. Delving into the genealogy of the SSEI and the WFE schemes as a case study allows to cast a more nuanced light on the concept of the "sustainable corporation" and its exact meaning. Since disclosed information serves as a basis to build the category of the sustainable corporation, the analysis of this dynamic is crucial to navigate the alleged new reconciliation between corporate activities and sustainability. Moreover, the analysis of the indicators production process makes it possible to understand the power dynamics underlying ESG factors disclosure and provides insights on how the allocation of regulatory responsibilities crucially determines outcomes in the design of the framework that is supposed to guide the reallocation of capital in line with sustainability imperatives.

In order to analyze ESG and sustainability disclosure and its specific characteristics, the paper provides the first investigation of the SSEI and WFE frameworks for reporting ESG issues to investors. Attention is devoted to the development of this new global infrastructure for ESG considerations reporting, which are the forces behind it and how it produces knowledge and governance effects. In fact, it is impossible to explain the emergence of this new paradigm and how it is built without understanding the underlying institutional dynamics and the legal framework into which the main actors navigate. This analysis sheds light on how global governance regimes are produced, how stock exchanges are main actors of financial market regulation and how the concept of sustainability is built according to the logic of the players involved.

To describe the functioning of this disclosure framework it is insufficient to think of investors as demanders and users of ESG issues information and corporations as the recalcitrant target of these metrics. In fact, this supply and demand scheme disguises the role played by most of the actors involved and reduces hotly contested political matters to technical issues. Furthermore, that would risk reducing ad unum the conflicting interests existing within general and ample categories as "corporations" and "investors". Finally, this simple model doesn't say much on the relationship between ESG issues that investors are concerned with and the more general idea of the sustainable corporation, that is supposed to solve some of the aforementioned global challenges.

The paper advances a composited theoretical framework for assessing the production of transnational global governance, complementing three central insights. First, the conceptualization of indicators as technologies of global governance. (16) Second, the conceptual model developed by Buthe (17) that describes four sets of groups to understand the production and use of indicators. Third, the theorization of the role of transnational financial associations as fundamental institutions for the expansion of global finance and production of corporate governance regulation in several arenas. Complementing these insights allows us to understand both the dynamics and power effects internal to the actors involved in the production and use of the indicator as well as the more political role that the production of the indicator has at the global level.

The paper makes several contributions to existing scholarship: (i) it identifies why the call for ESG factors disclosure emerged, how it differs from CSR and SRI, and which is the underlying concept of sustainability that is embedded into the indicators; (ii) the proposed conceptual framework allows to provide the first analysis of the genealogy and production of the SSEI-WFE indicators, its political economy, and how and why the allocation of regulatory responsibilities deeply affected the final indicators. Moreover, the framework can be deployed to study other sustainability issues disclosure frameworks; (iii) finally, the limits and contradictions of business risk ESG factors disclosure are individuated as rooted in the political economy of the modern corporation, whilst it is discussed how third parties interested in a broader concept of sustainability should interact with business-focused ESG factors disclosure.

The argument proceeds as follows: Part II provides a brief history of CSR and SRI in order to analyze how the shift to business-case ESG reporting consummated and why it represents a significant turn. Part III presents the analytical framework adopted. Part IV assesses the production of the SSEI 2015 model guidance and part V addresses the WFE production of key performance indicators. Part VI considers the implications of the analysis provided.

II. FROM CSR TO SRI AND ESG INDICATORS: ACRONYMS AND BEYOND

Between the end of the seventies and the beginning of the eighties, a deep turn affected corporate culture and managerial behavior in the US and the UK, bringing to the forefront shareholder value maximization (18) as the guiding principle for the management of corporations. Agency theory, (19) a branch of neo-institutional economics, (20) formally articulated several reasons why managing a corporation with the sole objective of maximizing shares value turned out to be in the interest of society as a whole. (21)

A prominent line of research carried out by four financial economists, (22) argued that legal origins and legal rules were crucial in financial market development and tested these assumptions empirically (23). Whilst these studies did not hold further empirical tests, (24) they constituted the basis for exporting rules that empowered shareholders all around...