The Increasingly Important Role of Stock Exchanges in Social Contracts

The automation of markets enables a wider movement towards valuing companies on their moral contributions to society as much as their ability to maximise profitability, says HKEX’s Adam Wielowieyski.

The automation and computerisation of our globally connected markets may sometimes hide the social and value-setting role of capital markets. It is easy to forget that we, as citizens, seek to exchange obligations far beyond those that can be expressed in pure monetary terms. However, those responsibilities are becoming more closely intertwined with financial valuations and investment.

The Wealth of Nations, by Adam Smith, is often described as both a guiding light for the primacy of financial markets and the pursuit of individual self-interest as a driver of collective good. But there’s more to Smith.

Fewer readers are familiar with his earlier book, The Theory of Moral Sentiments, which provides a richer view of Smith than is commonly appreciated. Far from being a pure advocate for individual economic greed, Smith saw people as maximising their utility not only from pursuing the exchange of goods or services, but also from the exchange of judgement such as approval, esteem, and other moral virtues towards the choices of others.

That assessment of value is increasingly being applied to financial investment. The growing emphasis on exchanging social obligations will have a great impact on stock markets, the bastions of pure laissez-faire capitalism.

A Change in Valuation

Stock exchanges grew from coffee shops where traders met, socialised, and exchanged much more than just stocks. On the 20th anniversary of the listing of HKEX, it is interesting to observe stock exchanges return to this idea. As computers become ever better at determining the value of corporations based purely on quantitative constructs, the abstract numbers denoting revenues and costs, humans are increasingly freer to focus on the qualitative gains and losses behind the numbers.

The growth in Environmental, Social and Governance (ESG) strategies is a part of this wider movement to value companies on their moral contributions to society as much as on their ability to maximise their profitability. Markets are unmatched in their ability to encourage innovation and technological improvement, and are increasingly a key arena to promote the public good and societal benefit of business.

The unprecedented impact of the Covid-19 pandemic will accelerate this change. We have never before seen such widespread societal impact, from the millions of newly unemployed and the abrupt reduction in consumption to the potential moral hazards raised by the vast government subsidies now made available.

We are facing new questions on the relationship between businesses and taxpayers. Should companies automate manufacturing at the expense of jobs? Should businesses take advantage of cheap, dirty fuel, or invest in more environmentally-friendly sources of energy? What sacrifices do we make to our individual privacy to ensure the health of the community?

Conditions for Change

No one person or business has all the answers. However, we believe that the stock exchange, as a place that aggregates the consensus view of diverse actors and discovers the price of a company’s shares based on its value to all stakeholders, can provide some of the answers, given the right conditions.

Firstly, we need to improve information flow. Data on company performance based on classical metrics are vital, but getting trusted data on the societal impact of corporates is harder. We will need to open access to alternative data collected across different media, and establish rules and policies on its dissemination and use.

At HKEX we want to make it easier for investors to assess and compare ESG performance in any given financial product so we are launching the Sustainable & Green Exchange (STAGE), an online portal that provides access to sustainable financing information, education and research material.

Secondly, we must continue to promote clarity and transparency from corporate executives in how they evaluate their ESG obligations, risks and business impact. HKEX has raised the requirements on the boards of listed companies in this sense, but investors will increasingly demand even greater standards for the reporting of social considerations and how they align with what investors and policy makers expect and require.

Thirdly, the relationship between corporations and their end customers’ needs to become much more personal. Trust will be built when we see the human face behind the brands we use on a daily basis. There will be increasing pressures on institutional fund managers to seek investments that promote the best interests of the retail investor communities they represent. Equity finance may become much more equitable with less opportunity to hide behind opaque corporate veils and commingled fund structures, producing more benefits for shareholder communities.

Finally, we will increasingly struggle with questions over the benefits and costs of globalisation, and what companies should do when the right thing in place may conflict with the good in another. Society, using the market, has the power to guide us to an answer.

Our Role

Policymakers will face difficult decisions over the coming years on how to best work together as a global community. Gateway markets, such as HKEX, have unique roles to play in helping all stakeholders gain timely access to information and navigate the complex cultural differences between communities.

Done right, the differences between private and public equity should become even starker. Companies will increasingly choose to list in the public arena not only to raise capital at lower cost, but also to demonstrate their commitment to contributing to society.

As HKEX looks ahead to the next 20 years as a listed company, we can see that our core function will not change. HKEX will still be the best place for all stakeholders to meet and transact as they establish the fair value of a company. However, what society deems to be fair is changing, and HKEX is at the centre of that change. Adam Smith would be proud.

Adam Wielowieyski is Head of Collaborative Intelligence & Analytics at HKEX. 

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