Views on improving the integrity of global capital markets
28 October 2021

The Beginning of the EU Sustainability Wave

Environmental, social, and governance (ESG) matters remain at the top of the EU agenda. In the coming months, EU institutions are expected to work on several legislative files related to sustainable finance. Regulators are currently discussing the first package of delegated acts for the environmental objectives of the Taxonomy Regulation, the proposals for a Corporate Sustainability Reporting Directive, and a voluntary European Green Bond Standard.

Furthermore, the European Commission is expected to present its Supervisory Data Strategy, which would include a review of the Alternative Investment Fund Managers Directive and the European Long-Term Investment Fund Regulation. It also plans to review a proposal for a European Single Access Point as well as a legislative initiative for Sustainable Corporate Governance, all before the end of the year.

An interesting discussion on the current EU regulatory approach on ESG and corporate governance, and the challenges for asset owners and asset managers, took place during the CFA Institute and CFA Society Finland webinar “Regulatory Expectations and Impact of the EU Sustainable Finance Strategy” held on 11 October 2021. Sirpa Pietikäinen, member of the European Parliament, gave the keynote speech in which she remarked that the EU is at “the beginning of the beginning” in its transition toward a more sustainable economy. Today, organizations are increasingly incentivized to put in place transitional plans toward climate neutrality in the long term and to move their capital from risky investments to less risky (and greener) opportunities. It is important, however, that companies be externally audited on their board responsibilities regarding sustainability to ascertain whether they deliver what they claim. This type of external audit would create, de facto, a label for transitional firms.

Currently, climate-related risks are poorly accounted for by most carbon-polluting organizations. Last September, Carbon Tracker, a think-tank focusing on the effects of the energy transition to capital markets, published a study showing that more than 70% of the world’s largest listed carbon emitters, including European companies such as Air-France-KLM and BMW, and most external auditors, do not provide information on climate-related risks in their financial statements. During the panel discussion following the initial keynote address, Outi Helenius, head of sustainability and member of the board for Evli Fund Management, explained that a common framework on how to assess climate-related risks is missing in the financial statements. The framework developed by the Task-Force on Climate-Related Financial Disclosures would be a good tool that, if required for listed companies, could improve the consistency of financial statements with this type of disclosures. To have a thorough assessment of how well organizations are tackling climate change, however, businesses should provide forward-looking statements and not just information on their carbon footing.

Vesa Syrjäläinen, CFA, responsible investment analyst for Varma, focused on the challenges of the possible introduction of supply chain reporting requirements. He underlined that board members and management would need to be more proactive and have a complete understanding of all activities occurring across their organization’s supply chain to perform this type of reporting. However, organizations with supply chain activities in several countries, including emerging markets, may find it difficult to provide qualitative disclosures because of differences in terms of culture, language, and framework. In addition, companies’ supply chains often are completely made up of nonlisted companies. In this situation, these companies would not be subject to disclosure requirements.

Jesse Collin, head of legal and regulatory affairs at the Finnish Foundation for Share Promotion (Pörssisäätiö), discussed the main governance issues for European shareholders, and the upcoming European Commission proposal on sustainable corporate governance. He stressed that the Shareholder Rights Directive (SRD II) has brought many improvements for shareholders, but more work is yet to be done to ensure sufficient shareholder protection. For instance, the legal framework for cross-border shareholder engagement needs to be greatly improved to facilitate shareholder involvement in European companies.

Moreover, shareholders should have the opportunity to have a say on sustainability matters of the organizations. Similar to the SRD II requirement of shareholder approval for companies’ remuneration policy, sustainability policies should be approved by shareholders during companies’ annual general meetings.

Earlier this year, CFA Institute published the report “Corporate Governance and ESG Disclosure in the EU.” The study recommended that organizations have greater engagement practices with shareholders to ensure that the interests of company actors (e.g., board members, management, shareholders) are aligned. Furthermore, businesses should be encouraged to consider the interests of employees and society in their investment decision-making process. Integrating stakeholders’ needs in the company’ business strategy does not necessarily affect financial objectives or shareholder interests.

You can watch the webinar here: https://www.cfainstitute.org/research/multimedia/2021/regulatory-expectation-and-impact-of-the-EU-sustainable-finance-strategy

Photo credit: Getty Images Viaframe

About the Author(s)
Roberto Silvestri

Roberto Silvestri is EU Policy Specialist, Capital Markets Policy EMEA at CFA Institute. He helps reach out to regulators and stakeholders about the positions that CFA Institute holds and unravel the complexities of EU regulation for CFA Institute members.

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