ESG engagement under the new EU Shareholder Rights Directive
Upcoming EU Directive will boost IR/shareholder ESG engagement
The changes to the Directive will bring long-term shareholder engagement, governance and ESG communication to the fore.
Context: On March 14, the European Parliament voted on an adopted proposal to amend the Shareholder Rights Directive. The proposal acknowledges that greater involvement of shareholders in environmental, social and governance factors (ESG) is one of the levers that can help improve the long-term financial and non-financial performance of companies in addition to other issues such as cross-border voting.
What are the main changes to the Directive that will mostly directly impact companies?
I. Objective: Enhance the level and quality of engagement between investors and companies
What’s being asked of investors: While top shareholders in the UK currently disclose governance policies and processes through the UK Stewardship Code on a comply or explain basis, this Directive calls for similar transparency across the EU. The Commission is also asking for disclosure outlining how investment processes contribute to a long-term approach of investing, as well as other items such as conflicts of interest policies, and portfolio turnover.
Impact on companies: The call on investors to be more transparent on engagement policies will further pressure them to increase engagement with companies and to improve the depth and quality of those interactions. Companies therefore will have to step up their ESG communication plan as part of their overall investor relations program.
II. Objective: Improve the link between pay and performance of company directors
What’s being asked of companies: Publish complete details of pay information on each director in a user-friendly manner. There is potential in the future for the standardization of this data. The disclosure should expand beyond annual pay and allow investors to analyze longer term trends.
Furthermore, shareholders should be given the right to hold a binding or advisory vote on the remuneration policy and to vote on the remuneration report, which describes how the remuneration policy has been applied during the previous year. The goal of this policy is not to regulate the amount of pay, but to provide information for shareholders to have a say.
Impact on companies: Increased disclosure and potential risk of pay package failure. Companies should therefore boost their dialogue with institutional investors on director remuneration to avoid public shareholder dissent.
III. Objective: Make full and up-to-date shareholder identification more accessible to companies
What’s being asked of intermediaries: Deliver, when asked by companies, shareholder identification in order to facilitate engagement. Intermediaries should also help the flow of information back to shareholders in order to confirm votes cast.
Impact on companies: Companies will benefit from having greater transparency, particularly in non-disclosure markets (most countries except for the UK and France), which should enhance investor relations communication.
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