Investors ask for SDG-driven stewardship code for Europe’s Green Deal

Aviva and Federated Hermes suggest advancing SRD II in EU Sustainable Finance agenda

Aviva Investors has called for governance and stewardship codes in the EU to be overhauled to better integrate sustainability issues and the UN Sustainable Development Goals (SDGs).

“The integration of sustainability into corporate governance and investors stewardship codes is far from systematic. Internationally, no code has yet integrated the full governance implications of the SDGs,” the UK-based asset manager said in response to the European Commission’s consultation on its upcoming Renewed Sustainable Finance Strategy – the policy initiative succeeding the EU Sustainable Finance Action Plan, which aims to support the implementation of Europe’s Green Deal.

Aviva added that codes should be reviewed “through an SDG Governance and SDG Stewardship lens”.

In its response to the new consultation, Federated Hermes advocated for a stewardship code to be established at EU level. The recommendation echoes views voiced previously by the firm’s Head of Policy and Advocacy, Ingrid Holmes, who, writing for Responsible Investor last year, wrote: “We need to see, in the next phase of the EU Sustainable Finance Action Plan, a commitment to introduce a stewardship code for Europe, building on what has been put in place through the updated Shareholder Rights Directive.”

‘No code has yet integrated the full governance implications of the SDGs’ – Aviva

The new consultation has brought stewardship and governance into the core of the EU’s sustainable finance agenda, notably asking questions on how to take the Shareholders Rights Directive II of 2017 (SRD II) further.

Misleadingly, the full denomination of the SRD II is “encouragement of long-term shareholder engagement”, which introduced new stewardship requirements and obligations for investors. Its transposition deadline is September 2020. 

Although the original Action Plan on Sustainable Finance, which the Commission launched in 2018, did not mention shareholders rights or the SRD, it did commit to “Fostering Sustainable Corporate Governance” (dubbed ‘Action 10’ of the plan) by gathering evidence and exploring ways to introduce sustainability at boardroom level.  

The Principles for Responsible Investment (PRI) said in its response to the consultation that the SRD II does not reflect global best practice on stewardship and called for its revision to ensure that “stewardship is recognised as a possible tool across all asset classes” – not just one for shareholders – and that “sustainability is recognised as a central component of stewardship”.

It said the SRD II “does not set expectations for how different actors across the investment chain should discharge their stewardship responsibilities”. 

US-based investment manager Invesco backed this view, pointing out that investors across many asset classes, including fixed income, can also undertake engagement. 

A revised SRD II should ensure that ‘sustainability is recognised as a central component of stewardship’ – PRI

“Engagement should be considered beyond simply proxy voting in equities. The development of a Stewardship Code applied on a comply-or-explain basis could be envisaged to further develop best practice in this area,” Invesco said in its response to the consultation. 

ESG voting

The Renewed Strategy consultation also sought views on whether EU intervention is required to enable investors to vote more effectively on ESG issues. 

At least nine institutional investors want some action taken on the topic, among them Candriam, Mirova, Amundi, Aviva, Norges Bank Investment Management, Schroders, Standard Life Aberdeen, Caisse Des Depots Group, Invesco; as well as three investor groups: European Fund and Asset Management Association (EFAMA), Institutional Investors Group on Climate Change (IIGCC) and Eumedion.

Standard Life Aberdeen said the initial focus should be on establishing corporate reporting standards for ESG so that performance on these matters can be assessed. 

“This provides opportunities for investors to engage with companies on the quality of their reporting and on the level of their performance,” it said. “Should there be issues with either of these then voting action can be taken on an appropriate resolution, such as the approval of the reports and accounts or specific directors who may be responsible for this activity.”

Eumedion, the Dutch corporate governance forum, noted that listed companies are already required to publish a non-financial statement under the Non-Financial Reporting Directive, which is currently being reviewed. 

“We believe that the European Commission should introduce an annual, retrospective vote (at least advisory) on that non-financial statement. This could serve as an effective tool for investors to voice any concern they might have on the way listed companies approach sustainability risks,” Eumedion said. 

It would be helpful to enable investors to vote on a company's environmental and social strategies or performance ‘whenever investors deem it material’ – EFAMA

This practice was introduced in Spain in 2019, where shareholders of listed companies vote on ‘non-financial’ statements as a separate point in the annual general meeting.

Some investors, including Standard Life Aberdeen, emphasised the need for it to be made easier for shareholders to table resolutions.  

Service provider and research house Morningstar recommended exploring EU-wide standards for filing shareholder resolutions in a way that would prevent ‘frivolous’ resolutions, while also helping shareholders to navigate the current landscape. 

Morningstar said: “Presently it is very difficult for investors to place resolutions on European company corporate proxy ballots for general vote. This is mainly due to high holding threshold requirements combined with a limit on the number of co-filers.”

EFAMA responded that it would be helpful to enable investors to vote on a company's environmental and social strategies or performance “whenever investors deem it material and in line with end-investors’ interest”. 

“In many EU Member States still filing of resolutions is not possible or not effective. This should be changed too,” EFAMA said.