The European Fund and Asset Management Association (EFAMA) has published this week its response to the last European Commission’s consultation proposal for an initiative on sustainable corporate governance.
The EC’s consultation publicly launched last October 2020 aimed to gather data and to collect the views of stakeholders in regard to a possible initiative on sustainable corporate governance, at three levels :
-identify the need and objectives for EU intervention as well as different policy options,
-better assess the costs and benefits of different policy options and
-gather additional knowledge about certain specific issues (national frameworks, enforcement mechanisms and current jurisprudence).
Globally the EFAMA is very supportive to this European Commission’s initiative to ensure that environmental and social interests are fully embedded into business strategies to improve the reliability of information disclosed by companies under the revised Non-Financial Reporting Directive (NFRD) and, in turn, positively affect the quality of disclosures made to end-investors.
Except for one major concern addressed about the fundamental opposition between the interests of shareholders and those of stakeholders portrayed in the EU consultation paper, which depicts shareholders as exclusively interested in short-term financial returns, while European Supervisory Authorities, as well as EFAMA, have not found sufficient evidence of investor-driven short-termism in European capital markets.
“Investors value businesses that keep stakeholders’ interests in mind and adopt a long-term perspective with regards to sustainability and risk. Through a wide range of engagement activities, the asset management industry plays an increasingly important role in positively impacting investee companies on issues such as sustainability, governance, due diligence, executive remuneration and the overall business strategy. We firmly reject the assumption that shareholders are exclusively interested in short-term financial returns as it does not match the reality. We ask that more tools be given to asset managers to further strengthen their stewardship role.”Tanguy van de Werve, Director General of EFAMA
In its response, EFAMA provides evidence and recommendations it believes will contribute to achieving the European Commission’s objective.
Directors’ duty of care and stakeholders’ interests
The association agrees that defining stakeholders’ interests is essential to managing sustainability risks and opportunities and as such, that corporate directors should ensure to implement adequate procedures to identify, prevent and address possible risks and adverse impacts on stakeholders
“It is vital for companies’ prosperity that corporate decisions integrates both stakeholder and shareholder interests. (…) Several sustainability factors also constitute systemic risks that affect environment and society and, in turn, may become relevant to shareholders’ financial interests.”EFAMA
Question was asked, either stakeholders, such as for example employees, the environment or people affected by the operations of the company as represented by civil society organisations should be given a role in the enforcement of directors’ duty of care? To which EFAMA warns against an enforcement role for stakeholders which would put the accountability of directors to shareholders and stakeholders on the same rank and raise several unintended practical and legal issues.
Due diligence duty
In its intention to prevent greenwashing and ensure comparability, the SFDR new framework implies that financial players assess and report to investors on any principal adverse impacts of investment decisions on sustainability factors.
According to EFAMA,
“corresponding reporting requirements on companies to identify and disclose sustainability risks and adverse impacts in accordance with consistent metrics would improve the quality and availability of such information, enabling investors to fulfil their disclosures requirements and provide their clients with decision-useful information”
However, the association advises that any EU legal framework implemented for supply chain due diligence should not impose a competitive disadvantage for EU companies and consequently that companies not established in the EU but listed in EU regulated markets should be subject to the same obligations.
For EFAMA, the system would gain in having SMEs also involved in this framework but with a lighter reporting requirements and, possibly, be subject to a “comply or explain” approach whereby they could refrain from applying due diligence processes if the risk of adverse impacts is less relevant given their specific business model.
Other elements of sustainable corporate governance
Finally, EFAMA supports directors’ variable remuneration being linked to the achievement of long-term sustainability goals. Nevertheless, the association says prescriptive requirements would be disproportionate and would fail to adapt performance criteria to different activities, risks and investment strategies.
EFAMA encourages competent EU bodies to carry out further research on shareholder pay-outs and the drivers of short-termism in the EU before considering any legislative action in the area of share buybacks.
The full response is available here
Article: Joana Foglia – Source : EFAMA, ESA, EU