The European Fund and Asset Management Association (EFAMA) has published its response to the European Commission’s consultation document proposal for an initiative on sustainable corporate governance.
The initiative has been created to ensure environmental and social interests are fully embedded into business strategies.
EFAMA suggests that the initiative could contribute to the improvement of the reliability of information disclosed by companies under the revised Non-Financial Reporting Directive (NFRD).
In turn, this could positively affect the quality of disclosures made to end-investors, according to EFAMA.
However, EFAMA highlights the consultation paper portrays a fundamental opposition between the interests of shareholders and those of stakeholders, and depicts shareholders as exclusively interested in short-term financial returns.
Along with European Supervisory Authorities, EFAMA affirms that it has not found sufficient evidence of investor-driven short-termism in European capital markets.
EFAMA explains that any successful legislative measure will have to counter these assumptions and be based on a solid, evidence-based approach.
In its response, EFAMA provides evidence and recommendations it believes will contribute to achieving the European Commission’s objective.
Key priorities include defining stakeholders’ interests, which EFAMA explains is essential to managing sustainability risks and opportunities.
Additionally, it is identified that corporate directors can ensure that adequate procedures are in place to identify, prevent and address possible risks and adverse impacts on stakeholders.
According to the association, 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 environmental, social and goernance data do not support this objective.
EFAMA also advises against an enforcement role for stakeholders concerning the directors’ duty of care, suggesting that this would put the accountability of directors to shareholders and stakeholders on the same rank and raise several unintended practical and legal issues.
Further to this, EFAMA affirms that 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.
Elsewhere in its response, in terms of 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.
Despite this support, the association says clarifications on specifications and implications attached to due diligence duty are necessary to determine additional recommendations.
Giorgio Botta, regulatory policy advisor at EFAMA, comments: “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,” Botta adds.
Tanguy van de Werve, director general of EFAMA, says: “Investors value businesses that keep stakeholders’ interests in mind and adopt a long-term perspective with regards to sustainability and risk.”
According to Werve, 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 reality. We ask that more tools be given to asset managers to further strengthen their stewardship role,” Werve concludes.
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