Position Paper January 2021
Corporate Governance and ESG Disclosure in the EU
An educational update and advice for EU policy makers, European companies, and European investors regarding corporate governance in the EU in the face of SRD II, NFRD, and other initiatives derived from panels with high level stakeholders.
Corporate Governance and ESG Disclosure in the EUView the full article (PDF)
This report updates one done in 2016, “Corporate Governance Policy in the EU,” in which we looked at the main governance issues in the EU, and gave recommendations to the key players involved in the reshaping of better European corporate governance practices to provide greater transparency and corporate accountability as well as to ensure maximized value for interested parties. Since then, several legislative and nonlegislative measures, including the Shareholder Rights Directive II (SRD II) and numerous sustainable finance initiatives, have been introduced in the EU, Because of these evolutions, we decided to update our previous report to focus on the unaddressed problems that investors still face on the governance side, and on the impact that the recent initiatives on ESG disclosure may have had on the industry and investors.
■ We are particularly concerned about the scarce level of protection that is ensured to minority shareholders. We encourage EU and national regulators to further improve the rules on the exercise of shareholder rights and accountability for minority investors.
■ We discourage the practice of differential ownership rights across the EU.
■ We urge the European Commission to focus, especially in light of the ongoing revision of the Non-Financial Reporting Directive (NFRD), on the inconsistencies between the EU legislations on disclosure of ESG and nonfinancial 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 could be further encouraged to increasingly include stakeholders’ interests, and to establish a longer-term horizon in their investment decision-making process to contribute to the ultimate benefit of society, which is an aim embedded in our mission statement.
■ Firms should build a more effective and consistent dialogue and engagement process 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, using a scoreboard of comparison to enable supervisory convergence.
■ Investors also should be more proactive in the engagement process to actively influence company’s decisions.
■ 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 thus far have prevented shareholders from effectively exercisingtheir rights.
This report intends to portray how ESG developments and corporate governance policies may merge into new regulatory frameworks aimed at strengthening the link between companies and the wider society, which includes shareholders and other stakeholders.
In one section we highlight the main legislative measures that the EU and the United Kingdom have introduced on sustainable finance, including measures to improve nonfinancial reporting, and corporate governance.
Another section examines the current issues that may curb the development of ESG integration in the EU. The problems that have been discussed in the three workshops and that are analyzed in the report mainly concerned the absence of shared views on the definition of sustainability between regulators and investors (and between investors in various regions of Europe), the nontransparency of relevant governance practices, the inconsistencies in the language of different EU legislations, and the potential effects of the recent ESG disclosure requirements under the SFDR.
A further section focuses on corporate governance approaches that have been adopted in Europe and the current issues that have emerged in the recent years, especially in light of the application of the SRD II rules.2 This section includes an analysis of the comply-or-explain mechanism and how this is applied by European corporations, the practices that do not guarantee sufficient protection to minority shareholders, and the evolving approach toward company employees (particularly after the outbreak of the coronavirus crisis).
In addition, we examine how European regulators and organizations have reacted to the impossibility of holding in-person AGMs, given the restrictions that the majority of European governments put in place in response to the pandemic.
With respect to Brexit, we look at development in the UK corporate governance practices, including corporate purpose and viability reporting. In our concluding section, we present three action memoranda for European policymakers, companies, and investors. These include relevant recommendations for the development of better corporate governance standards and practices in Europe.
About the Author(s)
Josina Kamerling is head, regulatory outreach, for CFA Institute for the Europe, Middle East, and Africa (EMEA) region and is based in the Brussels office. She is responsible for supporting CFA Institute's EMEA policy development, advancing the impact of advocacy efforts, and promoting capital market integrity and investor protection issues.
Roberto Silvestri is EU policy specialist for CFA Institute, and is based in the Brussels office. He supports CFA Institute capital markets policy activities and developments for the Europe, Middle East, and Africa (EMEA) region. Prior to joining CFA Institute, Roberto was a Robert Schuman trainee at the European Parliament in Brussels where he worked in the ECON Team of the Policy Department for Economic, Scientific and Quality of Life Policies. Previously, he had an internship at Assonime (Association of Italian joint stock companies) in Brussels.
Roberto holds a postgraduate master’s degree in European economic governance from the School of European Political Economy at LUISS Guido Carli in Rome, and a master’s degree in social and economic sciences from University of Rome Tor Vergata.