Rise of ESG
- Environmental, social, and governance (“ESG”) is an increasingly prevalent concept that is receiving heightened attention from organisations across the globe, reflecting growing public interest, rising issuer disclosure obligations, and evolving policy standards
- This interest is being reflected in the growth of assets being held in sustainable funds to USD 2.7 trillion as a the end of 2021, as well as growth of sustainable debt issuance to USD 1.6 trillion by the same period (up by a CAGR of 67% between 2016-21)
Teething Problems
- There are various challenges facing stakeholders that can be addressed by exchanges on the ESF front, including issuers (e.g. evolving customer expectations, unclear regulatory guidance, and data monitoring requirements) and investors (e.g. target identification challenges, arduous assessment criteria, variance across companies comparison, and time-consuming portfolio construction)
- To add to that, although ESG data and ratings are mostly handled and distributed by data redistributors, they all adopt different data collection and analysis standards / methodologies, such that there is no single “golden source of truth” regarding ESG data
- With investors increasingly scrutinising the ESG data / standards of exchanges, investment platforms, and corporates, non-compliant players are likely to be left behind
Opportunity For Exchanges
- Securities exchanges play a critical role as a: (1) regulatory enforcement body; (2) ESG market trading platform; and (3) ESG data collector for both issuers and investors
- As a centralised portal connecting regulators, issuers, and investors, we believe securities exchanges can play a major role in addressing stakeholder challenges
- Taking notice of this opportunity, exchanges across the globe are at different stages of maturity with respect to their ESG product and service offerings for issuers and investors, including ESG data services and reporting policies
- Our research indicates that the top-line revenue growth of exchanges that are actively incorporating ESG offerings has grown ~2x faster than their peers over the past two years
- We estimate that an additional ~USD 6.4 billion p.a. in revenues could be generated by securities exchanges worldwide by 2025 via ESG product and service offerings
- To capture this opportunity at hand, exchanges can explore a number of operating models when building their ESG capabilities: (1) partner (i.e. collaborate with a third-party service provider); (2) build (your own proprietary solution); or (3) buy (acquire a company with an existing proprietary solution), which should be evaluated for each specific product or service being considered
