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On Nasdaq’s most recent earnings call, chief executive Adena Friedman trumpeted the success of the stock exchange’s efforts to make money out of the clamour for companies to be greener, fairer to workers, and more socially responsible.
“It’s definitely the highest-growth part of the business,” said Friedman, referring to the revenues Nasdaq makes in its ESG unit, which advises companies on their environmental, social and corporate governance policies while helping them meet disclosure requirements.
Friedman said that the consultancy side of the business still generated the most demand, but that the bigger opportunity was selling software and data tools to help companies comply with reporting requirements demanded by rating agencies, investors and regulators.
“That’s going to be the long-term growth driver for us,” she said.
But one of the biggest threats to Nasdaq’s ESG business comes from an unlikely source: Nasdaq.
The company is waging a battle to dilute the US Securities and Exchange Commission’s unprecedented climate change disclosure proposal, which would force companies to reveal their direct greenhouse gas emissions and have them verified by a third party.
If enacted, the proposal would undoubtedly boost subscriptions to Nasdaq’s platforms Metrio and OneReport, which are intended to help companies measure and disclose ESG data. One of dozens of public companies to blast the SEC proposal, the stock exchange is worried the rules could hurt its core listings business. Nasdaq last year beat arch rival NYSE as the venue that landed the most initial public offerings.
The stock exchange has asked the SEC to rewrite the proposed rules — a move that would water down and delay the initiative. In a June letter to the regulator, Nasdaq encouraged the SEC to shift away from mandatory reporting and institute a “comply or explain” system instead.
Nasdaq said the climate proposal “could deter many companies from going public” due to higher compliance costs and an increased risk of facing litigation from investors.
Michael Miller, an analyst at Morningstar, said moving from voluntary reporting to “having people forced to do it” would push companies towards the kinds of tools being sold by Nasdaq and its rivals, which include the Big Four accountancy groups and several start-ups.
“Nasdaq’s position on the climate rule can be seen as running contrary to the interests of their ESG business, which would be a likely beneficiary of expanded reporting requirements,” he said.
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Simon Clinch, an analyst at Atlantic Equities in London, said the US regulator’s proposal was “a big deal” for Nasdaq’s ESG business. “The US is just the next leg of growth and the SEC’s climate disclosure rule is definitely a tailwind,” he said.
“If there is zero need to comply, then maybe that slows the growth a little,” Clinch added, although he said there would still be a “longer-term secular opportunity” for the stock exchange’s ESG business even in the absence of tough US disclosure rules.
Nasdaq’s apparently conflicted stance makes financial sense. Its ESG business, while growing at a rapid clip, generates a fraction of the revenues pulled in by its core listings business.
Although the company does not break out its ESG revenues, its investor relations and ESG segment generated $122mn of revenue in the first six months of this year, up from $112mn in the same period of 2021. Revenues at its listings business were $214mn.
“Listing is one of the most important businesses for Nasdaq so they will try to protect this business,” said Owen Lau, an analyst at Oppenheimer & Co.
Nasdaq is not alone in fighting the SEC’s climate proposals. The biggest US corporate lobbying groups are against it, including the Business Roundtable, which has described the suggested rules as “unworkable”.
But the stock exchange’s opposition to a key plank of the ESG agenda is nonetheless an uncomfortable position for a company that has burnished its socially responsible credentials to curry favour with investors. Starting this month, it required companies listing on Nasdaq have at least two diverse directors or explain why they do not.
And some of the companies that are backing the SEC in its climate push are groups such as Microsoft and Salesforce — the kinds of tech businesses that Nasdaq is known to attract.
Nasdaq said: “As a market operator, we frame up our positions with a view to improving the overall functioning of the market to the benefit of all participants.”
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