ESG Innovation in the Market

NASDAQ

5. Gender Equality 8. Decent Work and Economic Growth 9. Industry, Innovation and Infrastructure 11. Sustainable Cities and Communities 17. Partnerships for the Goals

Overview

ESG (Environment, Social & Governance) is one of NASDAQ's most recently updated innovations in guiding their publicly listed companies to increase transparency for their stakeholders who are increasingly concerned about the social responsibilities that large corporations are expected to fulfill. NASDAQ’s position as a major stock exchange allows them to help companies report sustainability metrics using their ESG framework. NASDAQ not only helps companies report on these metrics, but also helps companies improve on ESG measures, through their advisory services. Evan Harvey states, “Our ESG advocacy goes beyond performance measurement and disclosure guidance. We want to help companies master this part of their business” (Nasdaq, 2019). With both their reporting and advising services, NASDAQ is taking a big step in ensuring the companies they work with are accurately reporting and adopting ESG initiatives.

Authors

Hong Ta

Hong Ta

Rachel An

Rachel An

Hongwei Cai

Hongwei Cai

Austin Brooks

Austin Brooks

Nihar Raval

Nihar Raval

School

Rutgers Business School

Rutgers Business School

Professor

Jeana Wirtenberg

Jeana Wirtenberg

Innovation

In Aug 2017, Nasdaq launched a pilot program on ESG reporting for its Nordic and Baltic markets. They provided a service called Nordic Sustainable Bond Market which was designed to highlight sustainable investment opportunities that attract investors with a green, social or sustainable agenda. This program solution focused on industry ethical standards and national and international frameworks on corporate sustainability and sustainable development.

As the program evolved over time, ESG now provides data-driven metrics to evaluate whether companies are properly following through with their sustainability goal agendas. These metrics include elements such as carbon footprint, workplace diversity, and a variety of other factors that reflect how socially and environmentally responsible a company may be. The service allows companies to input the information and spread it out to all the standard-setters and metric makers simultaneously through an API structure.

ESG Innovation in the Market

Inspiration

Nasdaq is known for their great sense of mission to have a macro impact on society, and the people in the company reflect this culture. There are several green earth activists at Nasdaq, so they were especially very quick to respond to sustainability initiatives early on. Nasdaq experienced "strong client demand in ESG screened products and services across many parts of [their] organization," (Greenbiz, 2019) and because Nasdaq always had a strong sense of social responsibility, it was logical for the company to decide that an ESG program was absolutely necessary.

More specifically, the need for this reporting was seen when a shift of importance towards ESG metrics was seen by the company. As James Zhan, Director of Investment and Enterprise at UNCTAD stated, “Investor demand for high-quality ESG reporting has grown dramatically over the past decade. Once consumed primarily by niche investors, ESG data is now in high-demand from the biggest institutional investors in the world” (Roxi). Nasdaq saw the importance of these metrics to investors and the public and worked to develop a pilot in their Baltic and Nordic markets in 2017.

Aside from the business aspects, Tanya Smigocki, Senior Advisor of CSR, stated that the people she works with every day inspire her and the entire Nasdaq team to be a part of the world and have a greater purpose beyond generating revenue.

With the combined efforts of their individual passions, and Nasdaq's goal to provide the most modern technologies, Nasdaq is able to address one of today's biggest concerns: the environment and sustainability.

Overall impact

Besides financial factors, sustainable investing also considers ESG factors for the pursuit of competitive returns and positive impact for people and the planet. Corporate behavior impacts society and the environment. Thus, sustainable investors believe ESG factors are material to prospective investments besides traditional financial analysis to inform their investment decisions. In the business, sustainability, equality, and a clean environment are the essentials of financial performance and investors are embracing these determinants. Therefore, sustainable investing has a long-term effect. Another long-term effect of the ESG program is the market reaction.

The market is an engagement and valuation of ESG with the emergence of very large multinational organizations, an abundance of performance data and the shared global issues of climate risk, diversity, and access to economic opportunity. Adena Friedman, a Nasdaq CEO, stated, “Our goal is to take an increasing role in facilitating ESG practices, disclosures, and dialogue between investors and public companies. This not only creates liquidity for new investable products such as ESG index futures that focus on ESG principles - but it will also likely create a better, more sustainable economy over the long-term.” In brief, sustainable investors and markets are the long-term effects of the ESG program.

Business benefit

Nasdaq’s ESG reporting service has helped grow awareness of the importance of sustainability and the expectations upheld by consumers for large corporations to fulfill their duties in supporting environmental initiatives. Since 2014, S&P 500 companies have lost a total of $534M in market capitalization solely from ESG-related controversies. It’s clear that even with a clearly outlined code of ethics within these organizations, keeping up with these practices is increasingly difficult as technology allows more room for companies to go around these moral standards. With the launching of this reporting guide, Nasdaq has taken the first step in actively tackling ESG controversies and serves as a model for other companies publicly listed on their exchange to follow them in the same path. This has resulted in greater transparency between companies and their stakeholders. As a result of this greater transparency, stakeholders are increasingly more trusting of their involvement in these companies, solely because this reporting guide allows them to qualitatively and quantitatively see how the firm is fulfilling its responsibilities to uphold ESG standards. As a result, companies are able to physically see the improvement in their market efficiency. Especially in a generation where people are increasingly cognizant of the environment and sustainability measures, it helps companies regain a better image, and in return receive more support from investors.

As a result of the launch of this program, Nasdaq was able to achieve many positive outcomes such as lower cost of capital, reduced shareholder turnover, and enhanced talent recruitment and retention. ESG data point is also considered a useful tool for the opportunity in the new markets economy.

Social and environmental benefit

The innovative framework which Nasdaq innovated has undoubtedly made ESG reporting and investing easier for its listed companies, institutional investors, and individual investors. A vast majority of Nasdaq’s listed companies have dedicated resources and funding for the utilization of this framework as well as other ESG best practices. According to Morningstar, in 2018 the total inflow of cash into sustainable-focused ETFs was an impressive $5.5 billion. However, in 2019, as the Nasdaq published its ESG framework, the cash inflow grew to a whopping $17.76 billion (Hale, 2019). This equates to a 220% increase in cash inflow for sustainable investments and is large as a result of the increased knowledge and transparency of ESG investments fueled by the Nasdaq’s reporting framework.

ESG is a data-driven attempt to understand long-term performance. As mentioned, Nasdaq is uniquely positioned to assist companies in identifying and disclosing ESG related factors that are material to corporate performance. As Evan Harvey states, “The materiality process makes it easier for companies to not only understand what’s important but also to attack and improve those data points” (Greenbiz, 2019). Due to the high demand for high-quality ESG data reporting, Nasdaq is not only providing services to clients’ companies to identify the top ESG data that have importance internally and externally but also assisting them in improving those data points.

The services that Nasdaq provides to clients’ companies are not only benefiting the companies themselves but also improving on the market’s efficiency as a whole and helping them be more transparent to the public, all the while bringing awareness to sustainability practices.

Interview

Tanya Smigocki, CSR Senior Advisor

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NASDAQ

NASDAQ

New York City, New York, US

Business Website: https://www.nasdaq.com

Year Founded: 1971

Number of Employees: 1001 to 5000

Nasdaq is a large American stock exchange operated through an automated network of computers and is the world's second-largest exchange. Nasdaq has become a fintech giant with a huge array of multinational companies listed in their company such as Apple, Amazon, Microsoft, Facebook, Starbucks, Tesla, and Intel.