It’s been nearly three months since the Green Impact Exchange (GIX) filed an application with the SEC for approval of what is going to be the first green economy stock exchange in the US. On July 17, the US regulator published its notice to solicit comments from the investment community, which has until September 6 to submit its feedback.
As an exchange focused on dual listings rather than primary listings at the moment, GIX was founded two and half years ago by a group of Wall Street executives. One of them is Daniel Labovitz, who is also CEO. With a wealth of experience working as a financial services litigator, a prosecutor at the NYSE, a regulatory auditor and a consultant at his own firm – established with other co-founders of GIX – Labovitz says there’s a role for a green exchange to play in today’s sustainability landscape.
Here, he talks about the inception of GIX, the criteria companies that wish to list on it will have to adhere to and its plans and objectives for the future. As the backlash against ESG continues in the US, Labovitz also answers questions an ESG-skeptic would ask. These include questions around the need for such an exchange to exist today and why a company should choose to dual list on it given the number of voluntary frameworks and mandatory regulations already available to publicly listed companies.
What inspired you to create the exchange and what is its core mission?
As consultants, we had clients swirling around the ESG area, and we kept coming up against what we call ‘the trust problem’ among investors in companies that were making sustainable promises. Investors are conditioned not to trust corporate pronouncements on sustainability: they’ve been disappointed many times by companies that made promises and then backed away from them or failed to follow through on them.
When you look at the sustainability landscape, part of the problem is that the metrics out there are all voluntary and backward-looking. And then separately – but relatedly – what companies don’t talk about is corporate governance, which is the corporate infrastructure inside the company that supports those sustainability promises and transforms them from a press release into sustainable, concerted actions within the company.
We realized that, historically, stock exchanges established corporate governance standards to protect investors. Starting 150 years ago, the NYSE required companies to adopt standardized accounting, governance structures and disclosures in order to list on the exchange to ensure reliable information for investors. As a result, listing on an exchange became a gold standard for companies and investors. Those that could make that kind of commitment solved an agency problem for investors, which could then rely on the exchange listing as a marker of the quality of information supplied by the company.
If you fast forward to today, sustainability is in that same place. There are a lot of different ways of describing sustainable information. It’s all voluntary: companies can say anything or say nothing. We’ve even invented a nice word for potential fraud – greenwashing – to describe companies doing one thing and saying another. There’s a space for an exchange to step in. If companies want to list on GIX they must provide investors with certain information and verify that they’re in compliance. If they do that, they can get this credential connecting them to sustainable investors.
What criteria will GIX use to evaluate and list companies? What rules will listed companies have to adhere to and how do you expect these to expand or change in the future?
There are three levels of criteria for companies to list on GIX: values, vision and verification. The values criteria need to be set at the board level. The board needs to adopt a statement saying the company is committed to sustainability, with articulated goals. Related to that, the board must make a commitment to robust oversight – sustainability should be a regular focus of board activity, integrated into a committee’s responsibilities and the board’s agenda. This approach elevates sustainability to a KPI and a central measure of the board’s success.
In terms of vision, we go beyond the long term. The company needs to ask: What are the five and 10-year sustainability goals? Where are we headed? What are the waypoints between here and 2050 or the company’s target date? Those are things investors can use to evaluate progress. Related to that is the strategy the company will use to achieve interim goals [that] are logically related to a company’s long-term goals. [This is] a way of giving investors a marker of seriousness and focus.
And then the third criteria, verification, is about companies adopting an internationally recognized sustainability standard and reporting to investors so they can evaluate for themselves the company’s progress on its plans.
What has been the investment community response to GIX so far – and how do you plan to attract both investors and companies to the exchange?
July 30, 2024 was the first day the SEC published the comments that have come in. Since then, it has posted prior comments… I was excited to see that the United Farm Workers of America, for example, submitted a letter on behalf of 1.5 mn farm workers saying they are supportive of transparency and sustainability. That’s very positive.
In terms of how we are gathering support from investors, I believe they see the long-term value of what we’re doing. While a lot of the innovation on Wall Street in the last 30 years or so has been around the technology and process of executing trades, these innovations are impacting trading efficiency, not capital-raising. Companies benefit indirectly from these advancements but being able to talk to sustainable, long-term investors willing to trade short-term profit-seeking in exchange for longer-focused and more resilient capital value offers a more direct and meaningful benefit.
We’re looking for investors in GIX that understand that benefit. We’re also looking for companies that understand that this is not about politics but about creating long-term opportunities for investors to benefit, which is good for the company and consistent with its fiduciary duty to shareholders.
Given the recent backlash against ESG in the US – and for those who may be skeptical – how do you address criticisms that an exchange focused on the green economy might be premature or unnecessary?
We’ve been in touch with 800 companies and had substantive conversations with around 200 of them. Virtually every company will tell you that sustainability is on its mind.
It’s about value and resilience but also about the fact that regardless of what a company or a company’s executives may believe, significant portions of the company’s stakeholders care about sustainability – and those stakeholders have an economic impact on the company. Companies say this is something we must pay attention to regardless of what the politicians in Washington may be talking about these days, or what a state’s government is trying to mandate or push, because it’s about value. It’s about their corporate existence: that’s the first thing I would say to them.
The second thing is that GIX is qualitatively different from a voluntary standard because of the contractual commitment between the company and the exchange. A listing is an affirmative decision by the company to make a commitment to provide accountable information to investors – it’s a signal to the market that solves the agency problem.
Most ESG frameworks are voluntary but there are some mandatory regulations, such as CSRD in Europe – which also applies to some US companies – or the SEC climate disclosure rule. What would you say to teams working at firms that already carry out a detailed assessment of their ESG-related activities under one of these rules and may wonder why they need to list on GIX?
First, our listing standards are intentionally designed to be interoperable with existing frameworks – we are not trying to recreate the wheel. To list on GIX, you must report to one of the five or six internationally recognized reporting standards, one of which is CSRD. So if you’re already doing that, you can basically get credit from US investors for having done so.
The second thing is that CSRD and other mandatory frameworks apply only to a subset of US companies: those with European operations or that sell into European markets. On this, there are predictions that we will see some regulatory arbitrage, where companies structure themselves to avoid CSRD obligations as much as possible within the bounds of the framework. We’ve seen that with tax regimes and other regulatory regimes, where companies react to regulatory environments by restructuring to minimize their regulatory commitment. And I’m not taking a position on that – I’m just saying that’s how regulatory arbitrage happens.
Third, the US market is about 40 percent of the global equities market by market cap and many companies don’t meet the CSRD or other mandatory requirements. We want to capture those companies in an impactful way for investors, like how companies subject to those regulations are being captured for European investors.
On the point of interoperability, are you working with regulators, industry groups or other stakeholders?
Not directly. We’re regulated by the SEC, but we are not in an official partnership with any of the framework providers. Our chief green officer maintains relationships with various standard-setting organizations, climate organizations and advocacy groups, but no formal collaboration exists with them.
What is your long-term vision for GIX and how do you see the exchange evolving over time?
Our initial goal is to launch and get the exchange up and running. There’s a lot of wood to chop to get there, but our first goal after that is to start thinking about things like derivative equity products we could trade that would be consistent with our mission.
Further down the road, our goal is to introduce primary listings. While our initial stance is to complement what other exchanges are doing, it would be a natural evolution in our development to introduce them. As far as evolving our standards, we are keeping tabs on what’s happening in the global sustainability environment. Our standards tend to be somewhat regime-agnostic: by that I mean corporate governance structures and best practices for corporate governance can almost be applied no matter what regime you’re looking at.
I don’t feel our exchange standards will become outdated easily but, to the extent that there is a new, globally recognized standard for sustainability reporting, we would add that to our list in the rules of acceptable reporting standards, for example.
