European Parliament votes for fund manager voting, engagement and long-termism

Legislative text also outlines major reporting requirements for proxy voting companies.

The European Parliament (EP) has thrown its weight behind recommendations that would push pension funds and asset managers to have clear investment policies on shareholder engagement, monitor investee companies on ESG issues, vote their shares, and report each year how they do so – or clearly explain why not – under its approval vote of the Shareholder Rights Directive II (SRD II).
The text also requires fund managers to disclose on a comply-or-explain basis how their investment decisions reflect corporate medium- to long-term performance information, including non-financial factors, and contribute to medium- to long-term returns of their clients. It says they should publish relevant information to this end, including portfolio composition and stock turnover data.
The SRD II is part of financial regulation put forward by former EU Internal Markets Commissioner Michel Barnier in response to the global financial crisis of 2008. Barnier believed the original SRD needed to be overhauled to promote long-term investing and shareholder engagement for better governance to help prevent major financial crises.
The text, as amended by Parliament yesterday (July 9), was approved by 556 votes to 67, with 80 abstentions.
MEPs decided not to close the first reading, but instead enter into informal talks with EU Member States to seek agreement on a final version of the legislation.
The Parliament’s backing of institutional investor voting and engagement on a comply-or-explain basis mirrors existing Stewardship Codes such as in the UK.In its text the EP says if fund managers don’t have a voting and engagement strategy, they must have “a clear and reasoned explanation” why not.
On the recommendation of investment disclosure, the EP says Member States may allow “in exceptional cases” asset managers to abstain from disclosure if the information would be seriously prejudicial to its commercial position.
In the text, the EP also places a number of major information requirements on proxy advisors who often act as the voting or engagement consultants for shareholder governance activities. It says proxy advisors must make annual public disclosure on their methodologies and models, main information sources, and how they take national market, legal, regulatory and company-specific conditions into account. In addition, they will need to publish any communication or dialogues with the companies that are the object of their research and voting recommendations, as well as policies on potential conflicts of interest. Furthermore, they will have to provide staff numbers and the qualifications of those individuals involved in the preparation of voting recommendations as well as the total number of voting recommendations provided over the year.
Link to the adopted EP text on corporate governance: long-term shareholder engagement and transparency