09 February 2021

EFAMA responds to Consultation for an initiative on Sustainable Corporate Governance

he European Fund and Asset Management Association (EFAMA) has published today its response to the European Commission’s consultation document proposal for an initiative on sustainable corporate governance.

EFAMA supports the European Commission’s initiative to ensure environmental and social interests are fully embedded into business strategies. The association believes this initiative can contribute to improving 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. However, the consultation paper portrays a fundamental opp​osition between the interests of shareholders and those of stakeholders, and depicts shareholders as exclusively interested in short-term financial returns. European Supervisory Authorities, as well as EFAMA, have not found sufficient evidence of investor-driven short-termism in European capital markets. Any successful legislative measure will have to counter these assumptions and be based on a solid, evidence-based approach.

Giorgio Botta, Regulatory Policy Advisor at EFAMA, commented: “Investors would benefit from an EU legal framework that provides guidelines and increases transparency for companies, provided it remains consistent with the revised NFDR and avoids duplication with the requirements for financial institutions, such as those under the Sustainable Finance Disclosure Regulation. But it is also critical that this framework does not put EU companies at a competitive disadvantage. We, therefore, advocate for such a framework to be developed and promoted in coordination with other initiatives at an international level”.

Tanguy van de Werve, Director General of EFAMA, added: “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.”

In its response, EFAMA provides evidence and recommendations it believes will contribute to achieving the European Commission’s objective. Key priorities, as identified by EFAMA, are as follows:

Directors’ duty of care and stakeholders’ interests

• Defining stakeholders’ interests is essential to managing sustainability risks and opportunities. While shareholders, employees and customers are defined and can be identified by companies, other categories remain too vague for close-ended definitions to apply. Therefore, their identification needs to be left to a materiality assessment carried out by each company.

• Corporate directors can ensure that adequate procedures are in place to identify, prevent and address possible risks and adverse impacts on stakeholders. Requiring companies to set up measurable (science-based) targets would be premature at this stage, as current methodologies to set targets and measure performance and the current lack of reliable ESG data do not support this objective.

• EFAMA advises against an enforcement role for stakeholders concerning the directors’ duty of care. It would put the accountability of directors to shareholders and stakeholders on the same rank and raise several unintended practical and legal issues. It would create a mismatch between stakeholders, who would exercise control over the company’s decisions, and the company’s shareholders, who bear the economic risk linked to the business, and further dilute the influence they can exert through engagement. 

Due diligence duty

• EFAMA broadly supports the adoption of a principle-based approach when it comes to due diligence duty, consisting of guidelines and transparency requirements. However, clarifications on specifications and implications attached to due diligence duty are necessary to determine additional recommendations.

• To reduce competitive disadvantages for the EU industry, companies not established in the EU but listed in EU regulated markets should be subject to the same obligations.

• SMEs should have 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

• EFAMA supports directors’ variable remuneration being linked to the achievement of long-term sustainability goals. However, 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.
  

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