Investors across Europe are at risk of ignoring their role as responsible stewards, this is the conclusion of a new piece of research from Hermes Investment Management, the £33.5 billion manager. The Shareholder Rights Directive survey, A step towards sustainable capitalism, conducted with 175 European institutional investors to gauge levels of awareness and readiness for the Shareholder Rights Directive II (the Directive), reveals that only a staggering 3% believe their organisation already meets all the requirements of the Directive.
The survey also found that:
With the aim of enhancing the stability and sustainability of EU companies, the Directive, which needs to be implemented by member states in 2019, is part of a wider push to align the interests of those along the investment chain – companies, managers, owners and end beneficiaries – as well as with broader stakeholders. Investors will be required – on a comply-or-explain basis – to report publicly on their engagement activities and voting decisions.
Saker Nusseibeh, Chief Executive of Hermes Investment Management, believes the Directive has the power to address systemic failures of the industry.
“For too long, the majority of the investment community has neglected its fiduciary duties. Complex financial models, inadequately managed risk taking and inappropriate incentive structures laid the foundations of the Global Financial Crisis while investors turned their heads to short-term returns at the sacrifice of pensioners’ savings. Hermes has consistently and vocally advocated for change and helped shape capital markets through public policy and market best practice engagement and such actions have delivered higher industry standards and in turn, driven legislation such as the Directive.
“The Directive represents a profound shift for European asset owners and managers in becoming responsible stewards of investments. It is extremely concerning that 42% of investors have not heard of the Directive and there is a real danger that a lack of education and preparedness to meet its requirements will result in it failing,” Nusseibeh said.
Investors surveyed recognised the importance of environmental, social and governance (ESG) concerns. Overall, more than two-thirds (68%) believe that companies that focus on ESG issues produce better long-term returns for investors. This represents an upsurge from 48% of investors who were asked the same question in a survey in 2017.
Discrepancies across European member states
Dr Hans-Christoph Hirt, Head of Hermes EOS, at Hermes Investment Management, said: “The survey results have served as a barometer as to where member states are in the implementation of the Directive and whether obligations have been effectively communicated to investors. The astonishing degree of ignorance about the Directive’s requirements amongst investors in most parts of Europe reflects the lack of real progress in many member states and does not bode well for the achievement of the Directive’s underlying objectives. ”
However, positively 73% of Dutch and 68% of UK investors, believe companies that focus on ESG produce better long-term returns while 73% of German respondents believe the consideration of ESG factors is part of their fiduciary duty. The high levels of appreciation and understanding of ESG in these countries is mirrored in levels of investors who were aware of the Directive; 88% of German investors, the highest reported, followed closely by the Netherlands (79%). Awareness is surprisingly much lower in the UK (45%) but this is likely to change as the UK catalyses a more ambitious set of policies with the update of its stewardship code and in turn, guidance on implementation of the Directive.
At the other end of the spectrum are Spain and Italy, laggards in comparison to their European counterparts. Not one investor in either country responded ‘yes’ when asked whether their organisation already met all the requirements of the Directive. Despite a public consultation in Spain and legislative text being issued in Italy, awareness of the Directive is at low levels in both countries at 42% and 36% respectively. There is a real risk of late or ineffective implementation and the possibility of a lost opportunity for companies and investors in both countries if the changes the Directive envisages remain a low priority for governments.
A chance for real reform
It is clear from the results that asset owners, asset managers, member states and regulators have more work to do on understanding and implementing the Directive if we are to reap its envisaged benefits by achieving its objectives, namely more sustainable European companies and ultimately economies. There is currently a disconnect in some European countries and as a result, investors across the continent are in the dark and unable to start addressing the compliance gaps and become responsible owners of companies.
Hirt continued: “The Directive represents a historic opportunity to address some of the problems in capital markets and ensure capitalism functions in a fairer and more transparent way in the interests of all stakeholders, not least millions of pension savers. It could be the first step towards more sustainable capitalism in Europe. There is a danger that if action is not taken promptly, some member state economies and investors will miss the chance for real reform.”
To download the research report in full click here.
 Responsible Investing: The persistent myth of investor sacrifice, Hermes Investment Management, October 2017