SRD II to Boost ESG

    Stockholm (NordSIP) – With the implementation of the amended Shareholders Right Directive (SRD II) due in June, NordSIP is looking forward to the enhanced transparency and engagement it will bring to investors. The new disclosure requirements will highlight excellence in sustainable investment and create pressure for others to catch up.

    The directive aims to tackle shareholder inertia and obstacles to the exercise of shareholder rights. “The new rules aim to contribute to the long-term sustainability of the EU companies, enhance the efficiency of the chain of intermediaries and to encourage long-term shareholder engagement,” according to the European Commission.

    The directive revamps three crucial aspects of the relationship between asset owners, investors and companies. First, institutional investors and asset managers will have to be transparent about their investment and how they engage with the investee companies. A ‘comply or explain’ approach will require an explanation from the investor if it decides not to make the necessary disclosures. The directive will also give shareholders a say on directors’ pay and create a stronger link between pay and performance. Finally, the new rules will simplify the exercise of shareholders voting rights.

    There is an industry consensus in support of the reform. “By under-delivering on stewardship, the investment industry is leaving beneficiary value on the table and missing the opportunity to have a positive impact on the environment and society,” says Dr Hans-Christoph Hirt, Head of Equity Ownership Services (EOS) at Hermes Investment Management.

    “SRD II is widely recognised among industry participants as a move in the right direction,” elaborates Haroun Boucheta, Head of Public Affairs at BNP Paribas Securities Services. “Increased transparency could facilitate more dialogue between issuers and their shareholders. And when combined with other initiatives targeting long-term engagement and funding source diversification for issuers, SRD II could lead to longer-term engagement and investment in issuing companies,” adds Boucheta.

    By increasing the minimum level of disclosure required of the industry, SDR II will give sustainable investors ESG performance information on more companies. The new rules will simplify the identification of best practices and pressure laggards to catch up. European institutions explicitly considered such an ESG incentive. “Greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies, including as regards environmental, social and governance factors,” according to the directive. The directive goes on to clarify that the enhanced disclosure of information is “particularly useful to indicate whether the asset manager adopts a long-term oriented and active approach to asset management and takes social, environmental and governance matters into account.”

    The directive was also met with widespread backing from international initiatives for sustainable investing. According to the PRI, the new EU rules, are ”strongly in line with the six Principles, especially Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. By placing a positive duty on all investors to consider stewardship and long-term factors, the Directive will address many of the weaknesses identified by PRI’s Global Guide to Responsible Investment Regulation. The PRI has previously demonstrated that the majority of European PRI signatories already comply with, or exceed, the disclosure requirements of the Directive.”

    One concern is that the industry is not prepared for the level of disclosure imposed by the new rules. According to a survey of 175 European institutional investors by Hermes EOS, only 3% believe their organisation already meets all the requirements of the Directive. More alarmingly, 42% of European investors surveyed had not heard of the Directive. There was also a wide disparity in awareness among European countries. While 88% of German respondents were aware of the Directive, not a single Spanish or Italian respondents fully complied with the requirements. Another concern is that as a directive, SDR II does not have the direct effect of an EU regulation. The new rules are left to be incorporated into national law by the member states, which could create discrepancies in implementation across EU countries.”

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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