EU Rules Overhaul Needed to Scrutinise Transition Plans
Investor transparency on corporates’ decarbonisation strategies could require review of SRD II or introduction of European stewardship code.
Europe’s regulatory framework should be adjusted to better support shareholder engagement efforts and give investors more oversight of portfolio companies’ climate transition progress, according to industry experts.
Although there are plans in place to consolidate existing guidance to corporates on transition planning disclosure, investor scrutiny of transition plans could also require revisions to existing shareholder rights legislator the introduction of a bloc-wide stewardship code.
Non-profit Finance Watch has proposed a review of the EU Shareholder Rights Directive (SRD II), through which a mandatory vote for shareholders on investee companies’ transition plans should be introduced, it said.
SRD II outlines disclosure rules for corporates on themes like the remuneration of directors and requires asset managers to annually report on their engagement and investment strategies.
“Shareholders should have a binding say as to whether the company has a sufficiently ambitious strategy in place,” Vincent Vandeloise, Senior Research and Advocacy Officer at European NGO Finance Watch, told ESG Investor.
The Finance Watch policy briefing also called for SRD II to require investors to specifically disclose how their engagement policies align with their transition plans, and how their voting record contributes to their own climate transition targets.
“We don’t want a situation where an investor has set transition targets and has developed a transition plan, but their engagement activities are completely incompatible with those goals and that strategy,” said Vandeloise.
Transition plans are firmly on the regulatory agenda of the EU, with transition plans becoming mandatory under the Corporate Sustainability Reporting Directive (CSRD).
Earlier this month, the European Financial Reporting Advisory Group (EFRAG) published draft implementation guidance detailing how firms should ensure their climate transition plans comply with the CSRD’s European Sustainability Reporting Standards (ESRS), as well as the EU Taxonomy and Corporate Sustainability Due Diligence Directive (CSDDD).
Last year, the European Securities and Markets Authority (ESMA) and European Banking Authority (EBA) published a report assessing the implementation and effectiveness of SRD II, noting that the directive would benefit from revisions to ensure increased harmonisation across EU markets.
In its 2021 sustainable finance strategy, the European Commission included an action point to revise the directive to better reflect impact considerations and global best practices in its stewardship guidelines.
It’s expected that a new iteration of SRD II would come into effect in 2025.
Voluntary guidance
Alexander Juschus, CEO of the Association of Stewardship Professionals (StePs), countered that a mandatory vote for investors on transition plans “could be perceived as interference in the management of the company”.
Rather than amending SRD II, Juschus emphasised the importance of introducing more voluntary guidance to improve transparency among shareholders and to hone their engagement priorities.
“My vote would be for an EU stewardship code and a comply or explain solution [as it would] help to better structure engagement and reporting, and establish clear expectations with corresponding guidelines,” he said.
Earlier this year, the European Securities and Markets Authority (ESMA) published a series of recommendations for future work to evolve the bloc’s sustainable finance framework and promote transparency and ambition – including the implementation of an EU stewardship code.
“Asset managers and institutional investors should make their approach transparent or explain why they opt out – we should avoid mandatory solutions,” said Juschus.
Juschus also called for clarification around rules relating to shareholder collaboration in the Takeover Bids Directive.
“Rules on acting in concert prevent shareholders from cooperating effectively in a number of markets – for fear of violating this rule, many investors refrain from cooperating and pursue their own engagement,” he said.
Burdensome barriers
Broader issues with the SRD II also impede investors’ ability to utilise stewardship tools to the best of their ability, said Severine Neervoort, Global Policy Director of the International Corporate Governance Network (ICGN).
“We encourage the European Commission to address these issues through greater harmonisation of corporate governance and shareholder rights rules at the EU level – particularly through the revision of the SRD II (and potentially a transformation into a regulation),” Neervoort said.
She said the commission should look to remove remaining barriers to a modern and efficient voting process, by banning burdensome power of attorney requirements, physical attendance requirements, obstacles to split-voting, and manual processes.
“It should also ensure the ban on share blocking is implemented by all market participants in the European Economic Area (EEA),” Neervoort added.
“Many investors are also concerned by decisions in some member states to make the [pandemic] emerging measures of fully virtual annual general meetings (AGMs) or closed-doors AGMs permanent. This significantly limits the ability of shareholders – especially retail and minority shareholders – to interact with boards and management, ask unmoderated questions, and make statements from the floor.”
The commission should also consider lowering the minimum holding requirements under SRD II for adding items to AGM agendas and restricting the ability of the board of directors to reject resolutions, the Finance Watch policy briefing said.
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