| Investor Transparency |
Eurosif's Position on Investor Transparency Investor transparency has yet to be addressed at EU level, and is currently only encouraged rather than mandatory. In 2003, the first step was taken towards additional transparency with the IORP Directive, which set important disclosure rules in terms of pension risk management. However, this is not nearly enough for properly addressing environmental, social, and governance (ESG) issues. It is Eurosif’s belief that European Commission should introduce an EU wide mandatory Statement of Investment Principles (“SIP”) for Investment Funds in which trustees would state the extent (if at all) to which ESG considerations are taken into account in the selection, retention and realization of investments. Additionally, a description of their policy concerning the exercise of the rights (including voting rights) corresponding to their investments is essential for further transparency. Similar regulations have already been adopted in the UK, France, Germany, Sweden, Belgium, Norway, Austria and Italy and were recommended in a recent OECD consultation on Guidelines for pension fund governance. What Information Should Be Included? Where institutional investors communicate that they do have an SRI policy, they should provide information on how such policies are being implemented in practice, what results have been obtained so far and what trustees’ expectations are for the future. Thus, Eurosif believes it is essential that institutional investors report on how their responsible investment policy is implemented in practice and how they monitor its effectiveness in order to prevent a gap between SRI policies and practices. The notion of independent audit of policy implementation (including exercise of shareholders rights) is worth exploring in this respect. Where trustees have decided against developing a policy for the integration of ESG issues into investment decisions, they should also be required to report that decision and the rationale for it. The Importance of Institutional Investors Eurosif believes that the Commission should foster the development of SRI among institutional investors. Because they represent long-term beneficiaries who have a natural interest in preserving the wealth in their investment portfolios, pension plan trustees tend to focus on longer-term issues. Within the financial arena, institutional and private asset owners determine capital allocation and are therefore crucial to encouraging both corporations and financial institutions to move towards more sustainable behaviour. Progress will require key decision-makers to abandon conventional approaches to investing, which have thus far been based to a large extent on chasing short-term gains. As holders of some of the largest pools of investment capital with the greatest potential impact on industry practices, pension funds in particular are well-positioned to effect change. Pension fund trustees must give their asset managers clear mandates to incorporate ESG criteria into their investment decisions, reflecting their need to meet their long-term horizons for pension fund liabilities (i.e. payments to plan participants). The Importance of ESG issues ESG issues do affect the performance of companies. There is a growing consensus in the financial community that taking ESG issues into consideration is consistent with the fiduciary duty of investors when it impacts profitability, and is further relevant when there is a consensus to do so by participants /members /stakeholders. Ownership and power imply responsibility from trustees. ESG issues such as climate change, working conditions at suppliers’ factories, misaligned executive compensation, corruption and human rights have material impacts on stock values and investment portfolio performance. As evidence to this growing consensus, more than 800 financial institutions worldwide were signatories to the Principles for Responsible Investment (PRI) as of January 2011, representing over $22 trillion. Concluding Remarks As a result, Eurosif believes that trustees should be required to develop a policy for the integration of ESG issues into investment decisions unless 1) the trustees believe that such issues are not material factors in determining investment outcomes; and/or 2) the trustees believe that there are other reasons which means that such integration is not in the best interest of beneficiaries. Trustees should be required to document their policy in the SIP for the fund concerned. Similar to the effort to make ESG reporting from companies comparable, any statements of SRI should ideally be harmonized (see the Reporting and Assessment Framework developed by the PRI). Green Paper on Corporate Governance in Financial Institutions and Remuneration Policies (2010) In June 2010, the European Commission launched a public consultation in order to improve corporate governance in financial institutions. The Green Paper also opened for discussion a series of issues related to remuneration policies and how they can be improved in order to be more transparent and to incorporate long-term non-financial objectives. Eurosif responded to the Green Paper on September 1, 2010. Eurosif’s position concerning Corporate Governance in Financial Institutions is that there should be mandatory requirements for financial institutions to better disclose their practices - including the ones regarding environmental, social and governance (ESG) performance. Additionally, financial institutions should disclose how they use this information to make investment decisions. As stated in previous Eurosif position papers and responses to various initiatives (i.e. The Public Policy Position Paper related to Sustainable and Responsible Investment-SRI, 2009), mandatory disclosure of corporate governance practices is an essential aspect of avoiding future financial crises caused by short-termism, inadequate use of governance powers by investors, poor shareholder engagement, unenforced regulation, misaligned compensation and/or incentive systems and a lack of transparency. Eurosif's Response can be accessed in the Positions section. A review of received responses to the consultation process can be accessed at the following link. Next steps: The European Commission announced that in 2011 a new Public Consultation will be launched to address corporate governance in all listed companies. Directive on the Activities of Institutions for Occupational Retirement Provision (IORP Directive) (2003-2010) In July 2010, the European Commission has launched a Europe-wide public debate on how to ensure adequate, sustainable and safe pensions and how the EU can best support the national efforts. An important part of the consultation was dedicated to how theIORP Directive can be improved to ensure the sustainability of pension systems across Europe. Following the Occupational Pensions Committee (OPC) Report issued in 2008 and the Commission Report on the Implementation of the IORP Directive Eurosif believes that a review of the Directive is needed especially on the following aspects set out in the Directive: investment rules, custodianship and cross-border activity. As clearly stated in this Green Paper, the pension market needs to be strengthened, and to this end the IORP Directive plays the central part. Furthermore, Eurosif agrees that there needs to be a clear understanding and supervision of investment decisions, remuneration, incentive structures for service providers. Although Article 18(1) in the IORP Directive set out a series of investment rules, aimed at investing according to the ‘prudent person’ rule, Eurosif believes that attention must be given as well to qualitative rules with longer-term impact. We have seen what short-termism and excessive-risk taking can create during the current financial crisis, and for this reason all financial institutions must keep a vigilant eye on the long-term impact of their actions. For details on Eurosif's recommendations regarding the review of the IORP Directive, please read Eurosif's full response in the Positions section.
Related Information on Investor Transparency Download Eurosif's Response to the Pension Reform public consultation (November 2010); European Commission Website on Corporate Governance in Financial Institutions; European Commission Website on Pension Reform; (Last updated: January 2011) |
