IIGCC proposes a Responsible Management Code for the EU

At the end of July, the Institutional Investors Group on Climate Change (IIGCC) published the report Strengthening net zero stewardship in the EU.

For IIGCC, "the transition to a decarbonised global economy will be one of the defining trends of the next decade and the years to come." Furthermore, "the responsible management of investors can play a key role in creating long-term sustainable value and fostering behavioral changes that support the transition efforts of the companies they invest in, in line with the EU's net zero emissions commitments."

Responsible management approach

To this end, IIGCC believes that the approach to responsible management by investors should be strengthened and streamlined, with the review currently being undertaken by the EU of sustainable finance regulations being an excellent opportunity for this. Thus, the report outlines an approach with two essential parts. On one hand, the creation of a voluntary EU Responsible Management Code, based on clear and standardized principles related to engagement, escalation, and the integration of sustainability, referencing existing national codes. And in coordination with this, the EU's approval of regulatory reforms aimed at reducing information burdens, improving transparency, and enabling effective engagement across all Member States and across all asset classes.

IIGCC recognizes that policymakers already consider responsible asset management as a relevant tool for promoting sustainable finance in the EU, although the fragmentation of regulations creates complexity and avoidable inefficiencies. There is currently also no common approach concerning existing responsible management codes in Member States, as while some have "robust" codes, others rely on voluntary frameworks and many completely lack principles in this area. Therefore, it recommends drawing on the frameworks from the United Kingdom, Japan, Member States, and the European Fund and Asset Management Association (EFAMA).

Harmonized review

The report advocates for a harmonized review of the Shareholder Rights Directive II (SRD II) and the Sustainability Disclosure Regulation (SFDR) to coordinate information related to responsible management, expand engagement expectations beyond listed companies, and promote collaboration between entities and investors.

It also advocates for the safeguarding of the availability of meaningful data under the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), with the aim of facilitating informed engagement and voting by shareholders.

Notwithstanding what has been stated previously, from the perspective of corporate governance, the main issue of the report is the emphasis on the importance of ensuring that shareholders can effectively exercise their rights and influence the behavior of companies. In this respect, it proposes measures related to the general meetings of shareholders of the entities in which they invest and to the right to vote.

Regarding general meetings of shareholders, it notes that they are fundamental for shareholder oversight and, while virtual and hybrid formats may enhance participation (requiring physical attendance hinders international investors), they may also reduce relevant interaction. Therefore, it recommends establishing guidelines that ensure minimum standards for telematic participation in hybrid meetings.

Voting rights

Regarding voting rights, it advocates for the principle of "one share, one vote." While they may be useful in certain contexts, dual-class capital structures with differentiated voting rights should be balanced with minimum governance standards. In this regard, it recommends that regulations foresee (i) a maximum voting index to limit disparities between the different classes of shares, (ii) sunset clauses that phase out differential voting rights after a certain period, and (iii) the exclusion of multiple voting rights in the general assembly for the voting on key issues, such as votes on director remuneration and transactions with related parties.

Notwithstanding that the ultimate objectives are shared, the establishment of concrete measures should involve the participation of companies, as the proposals put forward by IIGCC could be perceived as interference in management, an obstacle to efficient decision-making, or excessive disclosure of sensitive information.

Consult the full opinion piece, published at Elderecho.com here.