“Comply or explain”: this is the principle which increasingly defines the regulatory framework, particularly in Europe. Regulation is increasingly pushing companies and investors to assume their responsibility towards society and the various stakeholders.
Companies are increasingly obliged to report on their environmental, social and governance parameters. As a matter of fact, the 2014/95/EU Directive governs the reporting of so-called non-financial data of major companies. As of 2018, they will need to include these in their annual reports.
It is a pity that the European Commission speaks of “non-financial data”, and is not already aligned with the market trends, which speak of extra-financial data, acknowledging the financial and economic impact of these ESG data. As a result, companies with more than 500 employees will need to publish their policies in terms of environmental protection, social responsibility and the treatment of employees, the respect for human rights, anti-corruption policies and the diversity of the boards of directors.
They may refer to the OECD recommendations in that regard. Indeed, last year, the OECD issued recommendations regarding responsible business behaviour for multinationals and institutional investors. Moreover, in June 2017, the Commission also published its guidelines and recommendations for companies. The goal is to encourage them to disclose their results in terms of social and environmental policies.
Institutional investors are faced with various pieces of regulation on that domain. We mainly refer to the IORP II Directive, which obliges institutions for occupational retirement provision (pension funds and pension schemes) to report on their approach towards the integration of extra-financial criteria. Moreover, the review of the Shareholders’ rights directive often refers, in its articles, to the obligation to integrate and to establish reports on the integration policy of ESG criteria. Moreover, the European Commission is still looking into the obligations of institutional investors and asset managers with regard to sustainability. For the sake of loyalty and prudence, institutional investors and asset managers are faced with fiduciary obligations which explicitly include environmental, social and governance (ESG) criteria as well as long-term sustainability.
Ophélie Mortier - Responsible Investment Strategist - Degroof Petercam AM