The idea of drawing up EU rules to ensure companies embed sustainability into the way they operate has met with steady applause from pensions and asset management industry representatives – as well as warnings of potential unintended consequences.
Questions put out by the European Commission in its consultation on
an initiative on sustainable corporate governance – which closed in
early February – centred around topics such as directors’ duty of care
and stakeholders’ interests, companies’ due diligence duties and board
composition and remuneration.
Brexit notwithstanding, public sector pension funds in the UK voiced
strong support for an EU legal framework in this area, and warned of the
financial fallout of inaction.
Cllr Doug McMurdo, chair of the Local Authority Pension Fund Forum
(LAPFF), said: “I want to emphasise that how we treat people and the
planet is financially material to our members’ investment
considerations.”
The delay in responding to the climate crisis had exposed the cost of
not acting as much greater than any cost of taking effective steps as
quickly as possible, he said.
This was true across the ESG spectrum in the LAPFF’s experience, he
said, and was why his organisation was so invested in working toward a
just transition.
“A good EU legal framework would help to institutionalise this process,” McMurdo said.
Eurosif, the European Sustainable Investment Forum, said that because
existing guidelines and standards had not always proven effective, it
was right that the EU should develop a legal framework for supply chain
due diligence to address adverse impacts on human rights and
environmental issues.
But the body also stressed rules needed to be proportionate.
“Smaller companies may have a far smaller impact on these matters than larger ones,” the umbrella organisation said.
The European Fund and Asset Management Association (EFAMA) suggested
small and medium-sized enterprises should have lighter reporting
requirements, and, possibly, be subject to a ‘comply or explain’
approach, allowing them to refrain from applying due diligence processes
where the risk of adverse impacts was less relevant given their
specific business model.
Norges Bank Investment Management (NBIM), which runs the Norwegian Government Pension Fund Global (GPFG), lauded the aim of the sustainable corporate governance initiative to encourage long-term thinking and ESG factors in company decisions.
But it also warned that imposing prescriptive requirements for
directors’ ESG expertise would be difficult to implement and could
impede board formation.
Similarly, the French Asset Management Association, AFG, said in its
response that the independence, diversity and complementarity of
expertise within a company’s board of directors were difficult balances
to achieve.
“There is no magic formula for board composition that would fit all companies,” it said.
“There is no magic formula for board composition that would fit all companies”
AFG
Issues of remuneration and composition of boards had to be adapted to
the size of the company, its capital structure, as well as its
maturity, the association said.
EFAMA took exception to the consultation paper’s portrayal of a
fundamental opposition between the interests of shareholders and those
of stakeholders – with shareholders being depicted as exclusively
interested in short-term financial returns.
Although it supported the Commission’s initiative to ensure
environmental and social interests are fully embedded into business
strategies, the Brussels-based lobby group argued that any successful
legislative measure would have to counter these assumptions and be based
on a solid, evidence-based approach.
“We firmly reject the assumption that shareholders are exclusively
interested in short-term financial returns as it does not match the
reality,” said Tanguy van de Werve, EFAMA’s director general.
AFG also challenged such perceived assumptions, and said: “The sole
focus on the payment of dividends is restrictive, especially as there is
a diversity of shareholders, and it seems reductive to consider that
investors are the cause of an excessive dividend payment.”
According to EFAMA, investors would benefit from an EU legal
framework that provided guidelines and increased transparency for
companies, as long as it remained consistent with the revised
Non-Financial Reporting Directive and avoided duplication with the
requirements for financial institutions, such as those under the
Sustainable Finance Disclosure Regulation.
But, said Giorgio Botta, regulatory policy advisor at EFAMA, it was
also critical that the framework did 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,” he said.
Meanwhile, Insurance Europe expressed its wariness of adding to the
duties its members already had, though it said it was supportive of the
EU’s sustainability objectives.
“Should the Commission decide to establish an EU-level legal
framework for sustainable corporate governance, it must strike the right
balance between the benefit of greater transparency and the burden it
would impose on companies,” the group said.
A framework like this should focus on sectors lagging behind in the
sustainability transition and look carefully at existing sectorial
sustainability rules, the insurance sector interest group said.
“For example, insurers are already subject to several requirements to
integrate considerations about adverse impacts on human rights and
environmental issues into their corporate governance frameworks,”
Insurance Europe said.
Taking a step back, however, others have questioned the whole notion
of using the force of the law in this area. George Dallas, policy
director of the investor-led International Corporate Governance Network
(IGCN), told a seminar recently that while the group supported the aims
of the Commission’s project, it was not so convinced that writing
certain activities into hard law was the route to take, and had concerns
about unintended consequences.
“To try to prescribe much of this in a legalistic context is something that we’re very cautious about,” he said.
“It isn’t the job of the board to correct market failures, it isn’t
the job of the board to, in the economic jargon, internalise
externalities […] that is the role of government, and regulators and
policymakers”
Steve Waygood, chief responsible investment officer of Aviva Investors
At the same online event, Steve Waygood, chief responsible investment
officer of Aviva Investors, appeared to warn against focussing too much
on the corporate governance framework.
He said Aviva welcomed the proposals from the Commission but “I don’t
think we can rely on corporate governance alone to create sustainable
markets”.
“It isn’t the job of the board to correct market failures, it isn’t
the job of the board to, in the economic jargon, internalise
externalities,” he said. “That is the role of government, and regulators
and policymakers.”
What drove sustainability most, he said, was when prices in the real
economy reflected costs to society and the environment and so the best
thing to do to align the global economy with the achievement of
sustainable development goals was not to “open up a raft of potentially
limitless litigation but to actually close down these externalities and
ensure they’re embedded in the balance sheets of business”.
IPE
© IPE International Publishers Ltd.
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