Who Guards the Gatekeepers? Stock Exchanges and the Limits of ESG Self-Regulation

This past semester, I had the opportunity to work on a Practicum project that benchmarked how major stock exchanges across the G20 provide ESG disclosure guidance to their listed companies. The work involved mapping each exchange’s sustainability reporting framework against an internationally recognized model, evaluating scope, specificity, and enforcement mechanisms. It was detailed, methodical work. But the deeper I got into it, the more a basic question kept surfacing: why are we asking stock exchanges to do this job in the first place?

Stock exchanges occupy an unusual position in modern capital markets. They are, in most jurisdictions, for-profit corporations owned by public shareholders. They compete globally for listings and trading volume. Their revenue depends on attracting companies to list and investors to trade. At the same time, they are expected to function as quasi-regulators, setting listing rules, enforcing corporate governance standards, and increasingly, pushing companies to disclose environmental and social information. This dual identity creates a tension that is easy to overlook when you are focused on building a comparison matrix, but nearly impossible to ignore once you step back and think about incentive structures.

A recent study by Huang, Kim, Rykaczewski, and Vulcheva (2025), published in the Review of Accounting Studies, examines exactly this tension. The authors investigate what happens to the oversight of listed firms after stock exchanges demutualize, that is, convert from member-owned nonprofits into shareholder-owned, for-profit entities. Using financial reporting quality as a proxy for regulatory effort, they find that oversight measurably declines after demutualization. Total accruals increase, earnings smoothing intensifies, and the likelihood of conservative loss reporting drops. Crucially, these effects are concentrated in countries with weak regulatory environments, where independent securities regulators lack the capacity or the willingness to compensate for the exchange’s diminished vigilance. In jurisdictions with strong, independent regulators, the damage is contained. The implication is striking: when an exchange starts caring more about its bottom line, the companies listed on it start getting away with more, unless someone else is watching.

This finding gains added significance when read alongside Krueger, Sautner, Tang, and Zhong (2024), whose study in the Journal of Accounting Research analyzes the capital market effects of mandatory ESG disclosure across 65 countries. They find that ESG disclosure mandates do improve stock liquidity, but only under certain conditions. The positive effects are roughly three times stronger when disclosure rules are implemented by government institutions rather than by stock exchanges. Moreover, mandates structured as strict requirements outperform those built on a comply-or-explain basis, and the benefits are amplified in countries where informal institutions, such as social norms and environmental awareness, reinforce formal rules. The takeaway is clear: for ESG disclosure to actually work, it needs to be backed by credible, independent authority. Exchanges, no matter how well-intentioned, are structurally compromised.

Reflecting on these findings through the lens of my own Practicum experience, I find myself rethinking what the benchmarking exercise was really measuring. We catalogued the presence and quality of ESG guidance documents, but the more relevant question may be whether the institutions issuing that guidance have any real incentive to enforce it. An exchange that risks losing a major IPO to a competitor is unlikely to impose costly disclosure obligations that the competitor does not require. The competitive dynamics of global capital markets push exchanges toward a race to convenience, not a race to transparency. The exchanges that appeared most progressive in our benchmarking were often those in jurisdictions where a strong government regulator was already doing the heavy lifting, and the exchange’s guidance was, in a sense, decorative.

None of this means that exchange-led ESG initiatives are worthless. They serve a signaling function, they help normalize sustainability reporting as a market expectation, and they offer practical templates for companies that have never produced such a report. But the evidence suggests that we should not confuse these voluntary, market-friendly gestures with real regulatory infrastructure. If we are serious about using disclosure as a tool for sustainable capital markets, the literature points in one direction: strong, independent government regulators with binding standards and credible enforcement. The ISSB’s convergence efforts and the EU’s CSRD represent steps in that direction. The question for emerging markets, where many of the exchanges I studied operate, is whether their regulatory institutions can develop the capacity to take on this role before the window of credibility closes.

Sustainable finance is often framed as a story about data, metrics, and reporting frameworks. Those things matter. But underneath all of it lies a governance question that is far more fundamental: who has the authority, the incentive, and the independence to make transparency meaningful? My practicum taught me how to compare what exchanges say. These two papers helped me understand why what they say may not be enough.

References

Huang, S. X., Kim, M., Rykaczewski, M., & Vulcheva, M. (2025). Regulation takes a back seat to business concerns: International evidence from stock exchange demutualization. Review of Accounting Studies, 30(2), 1916–1967.

Krueger, P., Sautner, Z., Tang, D. Y., & Zhong, R. (2024). The effects of mandatory ESG disclosure around the world. Journal of Accounting Research, 62(5), 1795–1847.