EU adopts roadmap to boost “patient and engaged” long-term investment

European Commission issues follow-up to long-term financing Green Paper

The European Commission, the executive arm of the European Union, today (March 27) adopted a package of measures aimed at stimulating long-term financing in a follow-up to a Green Paper published last year that seeks to develop pension funds as “key long-term investors”.

The Commission characterizes long-term finance as having three key features.

1) It finances productive activities; 2) It is “patient” as investors take into account the long-term performance and risks of their investments, rather than short-term price fluctuations; 3) It is “engaged” in that investors take longer-term aspects such as environmental, social and governance issues into account in their investment strategies.

“This sustained and direct engagement from investors ensures better alignment of incentives with longer term interests throughout the investment chain,” the Commission says.

A key part of the package – which includes an updated version of the ‘IORP’ pension directive – includes what the Commission calls “enhancing the wider framework for sustainable finance”.

This entails not only improving the corporate governance regime for long-term financing, for example regarding shareholder engagement (via a revision to the Shareholders’ Rights Directive due shortly), but also employee ownership, corporate governance reporting, and environmental, social and governance (ESG) issues.
The plan takes the form of a 15-page EU Communication.
A planned revision of the Shareholder Rights Directive “to better align long-term interests of institutional investors, asset managers and companies” is slated for the first half of this year.

Also due this year is a recommendation aimed at improving the quality of corporate governance reportingand a report on possible “additional transparency initiatives” to incentivise institutional investors and asset managers to take better account of ESG issues.

There will also be a “study on fiduciary duties and sustainability”.

The Commission points out that European pension funds have over €2.5trn of assets under management with a long-term horizon, and 75m Europeans depending on them for their retirement pension.

The so-called IORP 2, a revision to the 11-year-old Institutions for Occupational Retirement Provision directive, aims to improve funds’ governance and transparency and boost their cross-border capacity to “further develop occupational pension funds as a key long-term investors.”

The Commission argues that “significant long-term investment” will be needed under the Europe 2020 strategy growth package and the 2030 climate and energy framework.

The call for pension funds to be more active in financing the European economy comes as the financial crisis has hit banks’ ability to channel funds to the real economy, the Commission says.

The latest announcement follows the Commission’s Green Paper consultation on the long-term financing of the European economy of March 2013 and builds on similar long-term financing debates at the G20 and OECD.

Internal Market and Services Commissioner Michel Barnier said: “Our financial system must regain and increase its ability to finance the real economy. This includes banks as well as institutional investors such as insurers and pension funds.

“I am confident that the set of measures presented today will contribute to improving the ability of European capital markets to channel funds to our long-term needs.”