The rights of shareholders in EU companies are on the rise, and investors will soon be required – on a comply-or-explain basis – to publicly report on their engagement activities and voting decisions. This is a watershed in the evolution of shareholder rights, but are investors fully aware of the responsibility that comes with greater powers?
What is happening?
In May 2017 the European Parliament and Council agreed an amendment to the 2007 Shareholder Rights Directive ('SRDI'), to further encourage long-term shareholder engagement. Implementation of the amendment1 ('SRDII') by member states is required by 10 June 2019.
Who does it apply to?
In the main, asset owners and asset managers operating in Europe.
The requirements relate to shareholdings in companies with registered offices in, and whose shares are admitted to trading on a regulated market situated or operating within, an EU member state. Third-country intermediaries who provide services with respect to shares of such companies should be subject to the rules on shareholder identification, transmission of information, facilitation of shareholder rights, and transparency and non-discrimination in relation to costs.
What are the objectives of SRDII?
Shareholder rights are a key tool for institutional investors to achieve effective stewardship of their assets. The Directive aims to:
- Contribute to the sustainability of EU companies – by requiring investors to report on how the main elements of their investment strategy contributes to the medium to long-term performance of their clients’ assets.
- Enhance the efficiency of the chain of intermediaries − through identification of shareholders, improving the transmission of information along the investment chain, including on engagement, voting and manager reward, and alignment between investment strategy and client/beneficiary liability.
- Encourage long-term shareholder engagement – by requiring policies and reporting on engagement with investee companies regarding performance (on strategy, governance, and environmental and social issues), and providing investors with a vote on company remuneration policy and reports.
The amendment includes elements found in existing stewardship codes which have emerged over the last decade, such as those of Denmark, Italy, the Netherlands and the UK.
Additional Implementing Acts underpin the Directive’s aim of efficiency along the investment chain and greater consistency across member states through defining requirements for consistent disclosure along the investment chain on shareholder identity, meeting notices, methods of participation and exercise of voting rights.
What impact will it have?
We believe the Directive, if implemented effectively, will create a step change in the quality and quantity of stewardship through raising the awareness and expectations of investors and beneficiaries, and ultimately contribute to the sustainability of EU companies. The Directive will achieve this through:
- encouraging institutional investors to actively engage and vote their holdings, and therefore increasing use of shareholder rights and powers;
- raising institutional investors’ awareness of whether asset manager reward is driving the right behaviours and outcomes;
- requiring both passive and active managers to understand, engage and report on long-term and environmental, social and governance matters; and,
- increasing awareness in the investment chain on how strategies, engagement and voting contribute to the longer-term success of companies, and through this positive impact on society, the environment and economy.
What needs to be done to comply?
The Directive sets out requirements on disclosure and the facilitation of that disclosure along the investment chain. However, various actions will need to be undertaken in order to provide such reporting. Through increasing transparency and awareness, the Directive will shed light on the extent to which investors fulfil their responsibility as delegated stewards of financial stakes in a company and the assets of their clients and beneficiaries.
The disclosure requirements are summarised in the diagram below.
What are the key dates to be aware of?
Key deadlines are:
Is it legally binding?
Member States are required to bring into force laws, regulations and administrative provisions necessary to comply with the Directive. Asset owners and asset managers will be subject to such new law set by the member states.
What happens if I don’t comply?
The Directive states that: “Member States shall ensure that institutional investors2 and asset managers either comply with the requirements… or publicly disclose a clear and reasoned explanation why they have chosen not to comply with one or more of those requirements.”
Member States are required to implement rules on measures and penalties applicable to infringements of national provisions adopted.
These penalties, and the details of when an explanation of non-compliance is acceptable, are yet to be confirmed through transposition in each member state.
Why embrace the Directive?
The amendment to the Directive will empower investors through greater transparency along the investment chain, an extended set of rights and the removal of barriers to the exercise of those rights. Stewardship and the exercise of shareholder rights, when implemented effectively, is increasingly being viewed as an effective tool to improve returns, reduce downside risk, and achieve additional outcomes in the broader interests of beneficiaries.3 Ultimately, it can create greater long-term value for all stakeholders. These outcomes are borne out by independent research.4
How can Hermes EOS help?
Hermes Investment Management has a long track record of promoting responsible investment and active ownership. Its stewardship arm, Hermes EOS, has been helping clients become active stewards in the companies in which they invest since 2004. Hermes EOS’ purpose is to assist asset owners and asset managers in adding long-term value to their investments and managing their risks, by engaging with companies and policy-makers on environmental, social, governance, strategic and financial issues. Further detail on our services can be found in the Hermes EOS Stewardship Brochure.
Hermes EOS assists some of the largest and most respected global institutional investors to comply with stewardship codes and initiatives such as the UN Principles for Responsible Investment (PRI). In fact, Hermes helped draft and was one of the founding signatories of the Principles. As a value-added service, we help our clients with their PRI reporting obligations by providing data and narrative related to the activities we have performed on their behalf. We have a strong and respected reputation for our expertise, recognised by clients, as well as by the companies that we engage with. Companies often ask us for our investor perspectives and insight on behalf of the assets and clients we represent5 as our overall focus is on encouraging long-term, positive change in the businesses we engage with. Hermes EOS evaluates the link between engagement and improved long-term value on an ongoing basis, to inform and structure its activities.
Contact us for further information on how Hermes EOS can support you with the Directive.
- 1 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017
- 2 The Directive uses the term institutional investor for what may otherwise be referred to as asset owners (being pension schemes and insurers defined in ART1(2)(b)(e) of the Directive)
- 3 Such as equality and environmental protection
- 4 See, for example, Hoepner A., Oikonomou I., Sautner, Z., Starks, L.T., and X. Zhou (2018): ESG Shareholder Engagement and Downside Risk. Working Paper; Dimson, E., Karakas, O., and X. Li (2015): Active Ownership. Review of Financial Studies, 28(12), 3225-3268; Barko, T., Cremers, M., and L. Renneboog (2017): Activism on Corporate Social Responsibility. ECGI Working Paper No 509/2017; Principles for Responsible Investment (2018): ESG Engagement for Fixed Income Investors – Managing Risks, Enhancing Returns; Principles for Responsible Investment (2018): How ESG Engagement Creates Value For Investors and Companies
- 5 Currently representing approximately €400bn assets under advice