Why the Shareholder Rights Directive was the catalyst for the Minerva-Solactive deal

Market concentration, arguably one of capitalism’s chronic malaises, is widespread across the real economy and the financial services industry. The segment of shareholder voting research is no exception.

The market is served by the barest minimum of market players – almost to avoid an outright monopoly – with the dominance of the two North American firms ISS and Glass Lewis.

Legislation from the European Union offers a chance to bring more competition and business opportunities not just to the segment of proxy advisors, but also the stewardship market as a whole.

The misleadingly named Shareholder Rights Directive II (whose stated aim is: the “encouragement of long-term shareholder engagement”) actually introduces more requirements than rights for shareholders. It’s an update to a directive dating back to 2007.

It is in this context, and ahead of the directive’s June 10 transposition deadline, in which this week’s alliance between Minerva Analytics and Solactive can be analysed.

The relationship between the UK shareholder voting research firm (formerly Manifest) and the German index house is described as “complementary” by Wilson.

Minerva has a wealth of sustainable governance data and research that Solactive can use for its index business; and Minerva can harness Solactive’s presence in Europe, Toronto and Hong Kong, as well as its tech team.

“European investors now have an impetus to do more and be more transparent about their voting and stewardship,” Sarah Wilson, CEO and founder of Minerva tells RI.

In an attempt to increase transparency, the SRDII requires institutional investors and asset managers to disclose information about how they implement their engagement and voting policies.

“The directive really liberates the market and brings competition. Investors have to have the right to choose how voting is executed. For a very long time there have been competition barriers,” Wilson says.

Wilson notes that some unintended consequences derived from the original directive, notably: “Hysteria” about proxy advisors being portrayed as “the ones who are in control of the voting”.

“This is just not true, and there has been little attention to the way asset owners and managers made such voting decisions. We are just an intermediary in the process and our mission is to make it as efficient as possible.”

In addition, Europe willingly adopted the some of the US paradigm of shareholder voting, including the term ‘proxy advisor’.“There is a subtle difference in language which the European Commission found difficult to grapple with, but we are where we are with the directive,” Wilson says.

The alliance with Solactive does not alter Minerva’s shareholder voting research model, which includes the Manifest Voting Agency platform.

“Our focus is on empowering investors to make informed voting decisions with high quality, comparable and independent data,” says Wilson – stressing that Minerva is not entering the recommendations business.

Unlike its peers, Minerva doesn’t issue voting recommendations but customised voting policies through an engine that flags issues of direct concern for the individual asset owner or asset manager.

Minerva remains also free of the conflicts of interest that the directive requires proxy advisors to disclose: “We choose not have an issuer business,” Wilson says.

The directive calls on EU Member States to ensure that proxy advisors adhere, on a comply or explain basis, to a code of conduct.

The closest to a code that is available at the moment is the Best Practice Principles for Shareholder Voting Research https://bppgrp.info/, of which the number of signatories speaks volumes about the lack of competition in the market.

Apart from ISS, Glass Lewis and Minerva, the signatories are UK’s PIRC and France’s Proxinvest.

The latter is the managing partner of the Expert Corporate Governance Service (ECGS), the European network of proxy advisors, with members in Switzerland (Ethos), Germany (DSW), Italy (Frontis Governance), Spain and Portugal (Corporance).

Could the Minerva and Solactive deal make ECGS stronger and bring more competition to the market? “We are very happy to continue supporting them with research and data and voting execution as necessary,” Wilson says. But she adds: “We are not full partners of ECGS, because they make recommendations and we don’t.”

As for Solactive, a closer look at its latest products gives an indication of the increasing ESG focus of the German firm.

Solactive’s fingerprints can be found in Legal & General Investment Management’s L&G Future World Gender in Leadership UK Index Fund (aka the ‘GIRL’ fund).

And its Sustainable Development Goals World MV Index is behind a number of World Bank Sustainable Development Bonds.

UBS, Deutsche Bank, Natixis have also built products with the Solactive Sustainability Index Europe Climate or the Energy Transition Index.