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Responsible stewardship: How can the EU improve the Shareholder Rights Directive?

If the EU is serious about meeting its sustainability commitments under the EU Green Deal, we need an urgent review of the Shareholder Rights Directive.

By Maria Van Der Heide, Head of EU Policy, ShareAction

Public and private companies hold considerable power to shape the world we live in.

Their decisions can improve the sustainability and resilience of our societies. But they can also erode them, when not governed appropriately.

While companies have an opportunity to act in ways that help society, many still focus excessively on short-term financial performance instead of prioritising long-term growth and acting responsibly.

The Shareholder Right Directive II (SRDI II) – the EU’s investor stewardship tool – aims to counter this short-termism. It instead attempts to promote the adoption of corporate sustainability measures.

But it hasn't been enough.

How can the EU Shareholder Rights Directive II deliver for people and planet?

Today, the world faces huge challenges: a climate crisis, the destruction of our natural world, and continued human rights abuses.

If the EU is serious about meeting its sustainability commitments under the EU Green Deal, an urgent review of SRD II is needed.

The forthcoming Renewed Sustainable Finance Strategy offers the opportunity to announce measures to improve EU stewardship standards.

Today we have published our briefing on how the EU can set a strong stewardship standard by revising the Shareholder Rights Directive.

Read the briefing here.

The EU SRD II must set a definition for stewardship which puts sustainability at the centre

An essential step in strengthening SRD II is to embed sustainability in stewardship. Engagement policies under SRDII are currently not grounded in environmental and social sustainability.

A definition of stewardship that clearly links investors' engagement activities with companies to sustainability needs to be included in SRD II.

This will clarify that investors have a clear responsibility to better hold companies accountable for their impacts on communities and the environment.

It must focus on the effectiveness of stewardship and not just disclosure itself.

The main requirements of SRD II focus on disclosure and not on the quality and impact of the engagements with companies.

A revised SRD II should therefore require stewardship disclosure that focuses on the effectiveness of stewardship activities.

Investors should communicate the qualitative outcomes of engagement, not just processes. This should include examples of engagement successes and failures supported by a description of escalation actions in case companies do not take action or where action is insufficient.

It should tighten the rules on disclosure of shareholder votes

When it comes to voting, investors should be required to explain how their voting policies are aligned with the best interests of their beneficiaries.

Voting on resolutions is an essential component of effective stewardship.

But investors are currently not voting at selected companies and when they do, they vote for limited climate resolutions. This means they deliver a sub-standard level of basic stewardship.

Better voting disclosure allows institutional investors, beneficiaries and consumer groups to conduct meaningful comparisons of voting patterns among asset managers, asking for justifications and holding asset managers accountable where necessary.

...and it must address non-compliance of the rules it enforces

We propose various other measures to address non-compliance of the rules and to ensure enforcement.

First of all, the “comply or explain” approach for the disclosure of investor engagement policy needs to be replaced by mandatory requirements. The current flexibility given to investors in what and how they disclose does little to improve consistency and comparability in reporting across the investment sector.

Another factor that hampers the effectiveness of SRD II is the lack of granular standards of shareholder engagement. Therefore, various EU member states interpret and apply its provisions differently. More detailed requirements are needed, as well as clearer guidelines for the expected content of disclosure and engagement policies.

It must expand its inclusion of asset classes and harmonise the filing process of resolutions for maximum impact

The impact of SRII is hampered due to the limited asset classes it covers – not including non-equity investments.

We propose that the EU should include fixed income assets at a minimum, given that stewardship by bond holders and engagement in primary market debt is possibly the most impactful tool of stewardship.

Lastly, a better harmonisation and simplification of the filing process of shareholder resolutions would allow investors with long-term holdings in a company to raise important issues at annual meetings.

The EU has an opportunity to drive investor ambition – it shouldn’t be missed

Companies hold considerable power to improve the sustainability and resilience of our societies, but investor stewardship must be strengthened if they are to successfully influence corporates to positively shape the world we live in.

The EU is in a prime position to further advance the responsible stewardship agenda. This review is urgent and should not wait.

Our recommendations for a more robust Shareholder Rights Directive

  1. Embed sustainability in stewardship
  2. Stewardship disclosures should communicate the effectiveness of stewardship activities on behalf of beneficiaries or clients, and include details of any escalation actions taken
  3. Tighten the rules on disclosure of votes
  4. Require voting policies on ESG
  5. Remove the “comply or explain” approach
  6. Widen the asset class scope to include fixed income assets at a minimum
  7. Set more granular requirements to ensure consistent application of SRD II across EU member states
  8. Harmonise the filing process for shareholder resolutions

Download the full briefing >> Responsible stewardship: How the EU can improve the Shareholder Rights Directive

ShareAction will continue to engage with policymakers, financial institutions, investors and NGOs to provide practical recommendations and guidance to promote responsible stewardship in the investment system.

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