Transparency

Background

Transparency plays a key role when it comes to accountability. This is true both for companies and investors. Socially Responsible Investors gain valuable information when companies are transparent about their social, environmental and/or ethical practices. In turn, interested individuals and actors gain by knowing precisely which investment policies are carried out by which institutional investors. Ultimately, transparency on these matters allows for the market forces to judge their quality and relevance. Eurosif believes that at the EU level, transparency will be one of the key areas of focus in the years to come.

Eurosif position

As a result, Eurosif is keen to see strong transparency standards enforced or encouraged. Europe plays a central role in this context because national legislations or projects are often highly disputed, such as in the case of the UK’s ‘Operating and Financial Review’ (OFR). This transparency initiative would have asked for UK public companies to publish an account of a number of non-financial criteria, but in late 2005, it was dropped just prior to being approved. In this sense, EU legislation on transparency offers another means to move the transparency discussion forward that could have positive effects on all 25 member states.

Investor transparency

SRI Investor transparency has yet to be addressed at EU level. The 2003 IORP Directive which concerned pension funds did set important disclosure rules in terms of pension risk management. But this is only remotely close to properly addressing ESG issues. One option could be to set up a European equivalent to the Statement of Investment Principles (SIPs), which has already been approved in many European countries, including the UK, Germany, Austria, and Belgium. SIPs require pension funds to disclose if and how they take SEE issues into account as a part of their investment processes.

Corporate transparency

EU initiatives with regards to corporate transparency abound. These include:

Transparency directive

The European Parliament worked on the Transparency Obligation Directive (ToD) from November 2003 through Spring 2004. This directive was meant to improve information for investors about publicly traded companies on regulated securities markets within the European Union. Eurosif saw the ToD as an opportunity, albeit challenging, to address social, environmental and ethical (SEE) considerations in a harmonised fashion across Europe. Eurosif proposed an amendment to the Directive which asked for companies to report in their annual reports on the non-financial risks that their businesses face.

The Directive itself passed in the first reading of the European Parliament in April 2004. However, in a close vote, the Economic and Monetary Affairs Committee (EMAC) voted against the proposed amendment to include SEE criteria as part of what companies have to report. This is in part due to the notion that ‘material non-financial risk’ and greater SEE transparency were relatively new concepts to many of the ministers at the European level, and therefore, there was concern in how SEE criteria would be defined.

The positive news from the lobbying efforts is that Eurosif made some excellent connections with European Ministers of Parliament (MEPs) from across the political spectrum. These MEPs are now working with Eurosif to help push the agenda forward in other initiatives at the EU level.

To read more about the directive, go to: http://ec.europa.eu/internal_market/securities/transparency/index_en.htm

Corporate Governance Statement

(Draft Directive on the “Amendment concerning the directive on annual accounts of certain types of companies and consolidated accounts”)

In 2005-06, Eurosif closely followed the development of the European Commission’s “Corporate Governance Annual Statement” for companies. Meant to be the equivalent of the US Sarbanes Oxley legislation, the ‘Annual Statement’ was hotly contested by MEPs as there was concern that this would add on another layer of costly legislation for companies in the EU. Nevertheless, the Directive was adopted.

Eurosif proposed an amendment to ask that companies, when preparing their ‘Annual Statement’, be required to address SEE issues that were material risks to the business. This proposal was viewed as a helpful means to tie Corporate Governance to Sustainability issues by placing social and environmental risks in the context of corporate governance issues faced by companies.

The proposal was debated at length, and eventually made into a recommendation (‘recital’) rather than an enforced requirement. As it stands now, the legislation suggests that where relevant, companies may also provide an analysis of environmental and social aspects necessary for an understanding of the company's development, performance and position.

To read more about the directive, go to: http://ec.europa.eu/internal_market/accounting/board/index_en.htm

(Last Updated: May 2006)