ESG As a Leading Trend on Global Capital Markets in Recent Years

The COVID-19 pandemic has made it clear that socially responsible investing is not a fad or a marketing trick but rather one of the key trends on the global capital markets. Investors, market regulators, and companies are integrating ESG (environmental, social, governance) factors to address global challenges which we all have faced and will continue to face in the coming decades. Exchanges contribute to those developments as they engage in education and promotion of sustainable investing. While ESG factors reflect the status quo, they are forward-looking by definition as they show how to manage long-term risks and generate value, not only for the shareholders but also for all stakeholders. 

ESG: a key megatrend on the global markets

The year 2020 brought a breakthrough in more ways than one: the whole world stood still and fought the pandemic. In March 2020, one global exchange after another suffered turbulences triggered by frantic investor activity. Meanwhile, growing uncertainty and volatility on the financial markets put in focus the global trend of sustainable finance integrating ESG (environmental, social, governance) factors in corporate business. The trend is particularly strong on the capital markets across Europe, Canada, Japan and the United States with interest in green investments rising fast. Shareholders, bondholders, lenders, employees and consumers around the world, including Poland, have become alert to the way companies address environmental, social and governance factors.

Global investors focusing on ESG

According to recent reports from the international research provider Morningstar, assets invested in ESG funds reached USD 40.5 trillion globally as at 31 December 2020. In Q4 2020 alone, USD 150 billion was invested in ESG funds the world over, the vast majority (USD 120 billion) in Europe. Interest in ESG investment is strongly driven by a new generation of informed consumers who care about the environment, safety and stability of employment, and top governance standards. Three out of four sustainable equity funds outperformed the market benchmarks in 2020 while 25 out of 26 ESG index funds outperformed broad market funds. The index MSCI Emerging Markets ESG Leaders gained 150% in the last decade while MSCI Emerging Markets which covers all emerging markets stocks gained 59%.

GPW: Promoting sustainable development for more than a decade

The Warsaw Stock Exchange (GPW) has for years engaged in initiatives supporting sustainable development of all market participants. ESG has become a key focus for the largest capital market in Central and Eastern Europe. GPW published the CEE’s first socially responsible index RESPECT Index until the end of 2019. The index which served an important educational function for a decade was replaced by WIG-ESG in September 2019. Since its inception, WIG-ESG has been the underlying of investment funds. GPW joined the global United Nations initiative Sustainable Stock Exchanges in 2013. Its 100 participating exchanges follow the highest sustainable and responsible business standards and promote ESG excellence among their market participants. The next milestone in ESG integration was reached in 2020 as GPW joined the UN Global Compact, the biggest global sustainable business initiative of the UN Secretary General. In line with the UN agenda, GPW supports five selected Sustainable Development Goals (SDGs) including: good health and well-being; quality education; gender equality; economic growth; and industry, innovation and infrastructure. The GPW Group delivers and promotes sustainable development educational initiatives, maintains a dialogue and builds relations with capital market participants. We focus on a responsible HR policy and protection of the natural environment around our Group. GPW engages in many local and international initiatives to promote and support market participants in integration of environmental, social and governance factors.

WIG-ESG: Poland’s first green index

The index WIG-ESG has been published since September 2019 by the GPW Group member GPW Benchmark. It is the first such index on the Polish market, covering the 60 biggest companies listed on GPW participating in WIG20 and mWIG40. Their weights in the index depend among others on the ESG ranking and an assessment of compliance with the Best Practice for GPW Listed Companies 2016. The ESG ranking is based on reports of the renowned international ESG service provider Sustainalytics which scores companies for ESG integration. The scoring is based on public information disclosed by companies. The first product based on WIG-ESG was an NN Investment Partners TFI fund, which makes the index an investment tool. WIG-ESG is also the underlying of structured products.

ESG Guidelines for GPW Listed Companies 

Global investors openly declare that the already integrate or plan to integrate ESG factors in investment policies. This is an important message for companies, especially public companies, because unsustainable business may put them on a watch list or outside the global investors’ radar. Those developments are driven by EU sustainable finance regulations under the New Green Deal. As a result, GPW in partnership with the EBRD has appointed the international consultancy Steward Redqueen to prepare single guidelines on ESG reporting for companies listed on the Warsaw Stock Exchange. The project will deliver a document outlining a consistent reporting framework to help companies report their ESG activities and data in ways useful to capital market investors. The guidelines for companies will be aligned with the European requirements while accommodating the local specificity. It is essential for GPW to provide listed companies with a set of principles of good practice supporting effective non-financial reporting. The manual is being drafted in co-operation with a broad group of stakeholders including issuers, investors and regulators. The project will define clear criteria for companies to address investors’ expectations of non-financial reporting and thus become more attractive for investors.

Sustainable finance has become a leading trend within the last year, especially on the developed capital markets. Investors and companies realise that the trend has reached a point of no return and can only expand. The pandemic has shown that everyone faces the same global challenges. As a traditional meeting point for investors and companies, exchanges are a pillar of ESG integration on the market. Similar to other stock exchanges, GPW has for years actively supported all participants of the local market in that process.

By Izabela Olszewska, Member of the Management Board, Warsaw Stock Exchange