Investors often think of emerging markets as taking cues from their developed counterparts—for example, by aiming to boost consumption and to achieve productivity gains. It may come as a surprise that some emerging economies have made an earlier start in adopting environmental, social and governance (ESG) conventions than many of their developed market counterparts. Among the significant ESG developments in emerging markets are the promotion of stronger ESG and corporate governance frameworks by exchanges and regulators. Their progress is particularly timely, given investors' increasing focus on ESG: Signatories to the United Nations-supported Principles for Responsible Investing grew at an annual rate of more than 20% in 2019.1 In addition, 103 stock exchanges worldwide now participate in the Sustainable Stock Exchanges Initiative, representing over US $88 quadrillion in assets.2
Regulators and Exchanges Encourage Stronger Corporate Governance
In emerging markets, many exchanges and regulators are setting forth enhanced standards, often aimed at bolstering shareholder protections and corporate disclosure requirements. In some cases companies must adopt the standards in order to be listed on the exchange or segment. The results benefit many different stakeholders. Investors benefit from improving access to ESG information and potentially better business performance over the long term. Benefits also accrue to participating companies by way of improved overall corporate accountability and risk management, as well as the possibility of attracting new capital. Exchanges gain increased competitiveness and access to capital.
One such listing segment is Novo Mercado, part of Brazil's prominent B3 stock exchange. In the years leading up to the launch of Novo Mercado, investors in Brazilian equities faced two major challenges, as identified in a case study by the International Finance Corporation (IFC).3
- First was the prevalence of non-voting shares: Companies were legally permitted to issue up to two-thirds of their capital as non-voting shares. As a result, holders of voting shares could control companies by owning as little as 17% of the listed company.
- Second was a change of control law which enabled transfers of controlling shares to be completed at extraordinarily high premiums. At the same time, minority shareholders were left out in the cold, unable to sell their shares alongside the controlling blocks.
In December 2000, Novo Mercado was launched with the intent to achieve equitable treatment of all shareholders by instituting corporate governance requirements that extended well beyond Brazil's legal and regulatory framework. Companies listed on Novo Mercado can only issue common voting shares, and the same conditions provided to controlling shareholders during a change of control are extended to all shareholders, ensuring what are known as “full tag-along rights” for every shareholder. Companies must also adhere to enhanced transparency and monitoring policies.