Climate pledges, collaborative engagement and the EU’s new Sustainability Strategy

The European Commission will pursue new rules around climate pledges and collaborative engagement under its new Sustainable Finance Strategy, launched yesterday. 

Stewardship and engagement 

The Commission will ask European supervisors and national regulators to develop guidance to ensure that current rules preventing investors from ‘acting in concert’ do not “impede collaborative engagement by investors around common sustainability goals”. 

Such rules, which ban coordinated efforts by shareholders to pursue a common policy or strategy, are perceived as a barrier to some types of collaborative engagement with companies. 

In 2019, the European Securities and Markets Authority reiterated the need for clarity on the rules, which are currently laid out in the EU’s Takeover Bids Directive. 

“It’s good to see the Commission responding to ESMA’s suggestion for clarification to be given that collective investor stewardship activities focussed on sustainability should not give rise to competition law risks,” Steve Waygood,  Chief Responsible Investment Officer at Aviva, told RI. “We are aware that some institutional investors occasionally use this as an excuse for not engaging in a collaborative fashion which is not in the interests of clients or broader stakeholders.”

Michael Herskovich, Global Head of Stewardship at BNP Paribas AM also welcomed the Commission’s efforts, saying: “The acting in concert rule can create uncertainty regarding the extent to which a collaborative initiative can be undertaken. Investors will welcome further clarification and guidance at the EU level in order to create a uniform framework regarding the application of the acting in concert rule to collaborative initiatives".

The Commission is also considering bolstering the rules around stewardship in the Shareholder Rights Directive (SRD II). A 2023 review of the Directive will be used as an opportunity to update the stewardship guidelines to “better reflect impact considerations and global best practices”, the Sustainability Strategy said. 

ShareAction’s Head of EU Policy, Maria van der Heide, said the update should include mandatory rules around stewardship instead of the SRD II’s current comply-or-explain approach, and that it should “set the standard for what meaningful engagement is”. 

She adds that, given the high take-up of voting and stewardship activities by institutional investors, the Commission should not wait until 2023 to provide more clarity on expectations. 

 Sustainability pledges and science-based targets 

The Sustainability Strategy also promises to put pressure on companies and investors to create credible transition plans. 

“Pending possible further policy action in this area, the Commission will examine to what extent more guidance could ensure that voluntary [climate and sustainability] pledges are credible and will monitor progress over time across the EU,” said the document, which was published the same day that 41 new asset managers signed up to the Net Zero Asset Managers initiative, bringing the total assets covered by the pledge to nearly half of all capital in the asset management industry. 

At this stage, the Commission recommends that "financial institutions could use the EU Taxonomy and other sustainable finance tools to progress
towards achieving their plans at entity and portfolio level."

On disclosure and reporting, listed companies in the EU, including financial institutions, will be required to disclose sustainability targets and their progress towards achieving them under the EU’s proposed Corporate Sustainability Reporting Directive, its revamped ESG disclosure law. 

At the same time, the Commission has said that it will work together with EU public authorities to “help define intermediate targets for the financial sector”, and subsequently assist member states with monitoring the sector’s progress towards climate and environmental goals.

Mirjam Wolfrum, Director Policy Engagement at CDP Europe, said: “We particularly welcome the new strategy’s focus on promoting science-based targets in the finance sector, as this can unlock system-wide change”. 

ShareAction’s van der Heide also welcomed the move, adding: “The idea of the Commission looking into greenwashing more, and discussing with national supervisory bodies if they have sufficient enforcement tools to address greenwashing, is very interesting.”