The report finds that governance mechanisms in Europe still do not offer sufficient corporate accountability and protection of shareholder rights, and it makes recommendations for improvements. It also analyses the effects of incorporating ESG practices in European companies’ business models.
CFA Institute, the global association of investment professionals, today released a report that assesses the corporate governance and ESG disclosure challenges facing investors in the EU. The report finds that governance
mechanisms in Europe still do not offer sufficient corporate
accountability and protection of shareholder rights, and it makes
recommendations for improvements. It also analyses the effects of
incorporating environmental, social, and governance (ESG) practices in European companies’ business models.
Josina Kamerling, head of regulatory outreach for CFA Institute for the Europe, Middle East, and Africa (EMEA) region, commented:
“Companies around the
world have developed their own ESG integration policies, yet
significant variations remain. Measuring and comparing those variations
is a difficult task for investors. The Covid-19 pandemic
highlighted that much work needs to be done to improve investor
protection across Member States. Therefore, the EU has an opportunity to
appeal to regulators, companies, and investors to shape corporate
governance standards and increase their focus on ESG. Policymakers’
willingness to initiate a shift to more sustainable processes is clear,
and the current crisis is likely to accelerate this transition. Regulation alone is not enough, however; it must be augmented by greater engagement between core constituents.”
Corporate Governance and ESG Disclosure in the EU
comes at a crucial time when sustainable finance – including corporate
governance – is at the top of the EU’s agenda, with policymakers looking
to shape legislation in this field. It analyses the impact that recent initiatives around ESG disclosure have had on the industry and makes the following recommendations for future implementation:
- The EU and national regulators should further improve the
rules on the exercise of shareholder rights and accountability for
minority investors;
- The practice of differential ownership rights across the EU should be discouraged;
- The European Commission should focus on the
inconsistencies between the EU legislations around the disclosure of ESG
and non-financial information to enhance clarity and avoid
misinterpretations from organizations and investors;
- The definition of materiality needs to be reinforced to
ensure its intended purpose. Moreover, clear and consistent language
between the Sustainable Finance Disclosure Regulation (SFDR) and the
Taxonomy Regulation would help investors have a better understanding;
- EU companies should be encouraged to include stakeholders’
interests and a longer-term horizon in their investment decision-making
process;
- Firms should build a more effective and consistent
dialogue with shareholders to ensure that board directors, management,
and investor needs are better aligned. This effort should be monitored
by national supervisors and at the EU level;
- Investors should be more proactive in influence decisions when engaging with companies;
- If virtual or hybrid annual general meetings (AGMs) will
continue to be held in the future after gathering restrictions are
lifted, organizations should address practical and technical barriers
that have prevented shareholders from effectively exercising their
rights.
Overall, the report finds that several important obstacles remain in the EU for the greater development of ESG practices. Although
EU regulators seem to have moved towards a common definition of
‘sustainability’, there is no consensus among European investors and
market participants on the definition of ‘ESG’. Other important obstacles
for investors include the lack of transparency of corporate governance
practices, and misalignment of different EU regulations.
About the Research
This report follows on from the publication of Corporate Governance Policy in the European Union: Through an Investor's Lens
(CFA Institute, 2016). It draws upon three virtual workshops with ESG
and corporate governance practitioners in Europe, held between May and
July 2020. The three workshops comprised: a roundtable with experts from
EU member states from north-central Europe, one with participants
representing southern Europe, and one with practitioners from the United
Kingdom. Most of these individuals had participated in the roundtables
which underpin the 2016 report.
About CFA Institute
CFA Institute is the global
association of investment professionals that sets the standard for
professional excellence and credentials. The organization is a champion
of ethical behavior in investment markets and a respected source of
knowledge in the global financial community. We aim to create an
environment where investors’ interests come first, markets function at
their best, and economies grow. There are more than 160,000
CFA charterholders worldwide in 164 markets. CFA Institute has nine
offices worldwide, and there are 161 local member societies. For more
information, visit www.cfainstitute.org or follow us on Twitter at @CFAInstitute and Facebook.com/CFAInstitute.
CFA
© CFA Institute
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article