The German government’s sustainable finance advisory council is advancing proposals for a collaborative engagement platform for investors in the country after financial regulator BaFin indicated it would clarify its thinking on the issue.
German investors have largely been reluctant to take part in collaborative engagements due to regulatory uncertainty.
Michael Schmidt, senior adviser to the board at LAIQON and chair of the advisory council’s working group on the platform, said: “The obstacle that we have, particularly in Germany, is the unclear delineation between acting in concert and collaborative engagement.”
Only 15 German investors have signed up to Climate Action 100+, for instance, compared with 44 from France and more than a hundred from Switzerland.
At a meeting between the advisory council and finance minister Christian Lindner towards the end of last month, however, BaFin indicated that it would issue clarifications on its regulatory treatment of collaborative engagements.
Schmidt said BaFin had indicated that a number of case studies of collaborative engagement the group had provided were not in breach of acting in concert rules.
An exact date for the BaFin publication has not been given and a spokesperson for the regulator declined to comment on timing. However, BaFin said at the meeting in February that it would be a question of weeks and not months.
The BaFin clarifications, Schmidt continued, will remove a hurdle “and are a big prerequisite for actually forming a platform”. “We’ve come to realise that many players would be in principle ready to engage in collaborative engagement and maybe also join a platform, but they want to have as much legal certainty as possible,” he added.
The proposed platform will be named the German Engagement Platform for Sustainable Impact, or GEPSI. Firm plans for a secretariat have not been made, but the current proposal is to establish it as a separate structure under the aegis of an existing organisation instead of setting up an entirely new legal entity.
Recommendations on clarifying the legal basis for collaborative engagements and establishing a platform were first made in a 2021 report on sustainable finance in Germany, but progress was slow until the reconstituted council began work in September last year.
The exact details of the platform have not been finalised, as these would be down to participating investors to agree on. However, the advisory council has put together proposals for a broad framework, governance structure and financing.
The working group has looked at existing collaborative efforts including Dutch platform Eumedion. Tommy Piemonte, head of sustainable investment research at Catholic Bank für Kirche und Caritas and a member of collaborative engagement group Shareholders for Change, has also been involved in the working group as part of the council’s “expert pool”.
Schmidt said the working group is looking at three types of collaborative engagements carried out under the platform.
The first would see the platform staff themselves carry out engagements on behalf of members of the platform, the second would involve lead investors on the platform engaging on a certain topic with the support of other platform members, while the third would see individual engagements carried out by a single investor on topics from the platform’s thematic scope.
Membership will be open to asset managers and owners across the size spectrum operating in Germany, and RI understands that the platform is keen to get public investors involved as well, with at least one having already held preliminary discussions on signing up.
“The platform is designed to be as open as possible,” Schmidt said. “There are engagement platforms for specific topics and there are platforms for specific investor groups, but you don’t have a big platform wide enough for flexible issues which could range from climate change to biodiversity, from human and labour rights to governance issues such as board composition, corruption or the gender pay gap.”
Why is clarification needed?
“It’s important to point out that there is no actual concept of acting-in-concert that would be specified in the regulatory framework,” said Woldemar Haering, a partner at White & Case. “It’s been developed over time by regulators around the EU member states.”
There is no clear legal definition which would be taken into account in examining cases, especially in enforcement, he added. Instead, there is an evolving concept which has been driven by the ESAs and ECB on the European level, and by national regulators as well.
The main concern for regulators, Haering said, is whether a critical mass of investors pursuing a common and aligned approach towards a company, which may result in “exercise of indirect influence over management”, affects the company’s risk-bearing capacity in a way which could give rise to regulator concerns.
“What we are looking at is the regulatory risk that Bafin would treat a group of investors who are considered to act in concert as holders of a qualified holding in a regulated entity and would then consider them as being obliged to go through the shareholder control process, which also includes a ‘fit and proper’ assessment,” he continued.
“In practical terms that can become quite messy, because if you have a significant number of investors coordinating their views I would wonder how BaFin could take supervisory measures against a significant population of investors.”
On the antitrust side, there have not really been a cases where minority shareholders voting together or proxy campaigns have been viewed as antitrust infringements, or which show they are jointly controlling a company, according to Tilman Kuhn, a second partner at White & Case.
“The latter is probably because they would never reach the threshold for control, even jointly in terms of having a voting majority in the AGM,” he said. “Also, you need a long-term contractual or economic alignment on key issues relating to business strategy and not just one individual issue that is being voted on to find control.”