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Podcast: ESMA Report: Undue Pressure on Companies


Time to Listen: 4:32 Practices: Asset Management, Supply Chain Compliance & Corporate Social Responsibility

In December 2019, the European Securities and Markets Authority (ESMA) published a report in relation to undue short-term pressure on companies. In this Ropes & Gray podcast—the latest in a series of podcasts on ESG and corporate social responsibility issues—asset management partner Eve Ellis will provide an overview of the ESMA report and analyze key issues addressed in the report, such as the need for greater institutional investor engagement; amending existing EU legislation to address ESG disclosures; and reducing the focus on short-term investment pressure to help companies meet sustainability goals.

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Transcript:

Eve EllisEve Ellis: Hello. Thank you for joining me today on this Ropes & Gray podcast. This is the latest in a series of podcasts on ESG and corporate social responsibility issues. My name is Eve Ellis and I'm a partner in our London office, specializing in European regulatory matters for asset managers. Today I'm going to be discussing the ESMA publication, released last December, in relation to undue pressure on companies.

So by way of background, in December 2019, the European Securities and Markets Authority published a report in relation to undue short-term pressure on companies and specifically, the report outlined a number of recommendations to the European Commission in relation to undue short-termism in the financial markets. All of this is part of the broader, European-wide focus on sustainability in ESG which has been a real focus during 2019 and will continue to be a focus for 2020 and beyond. Whilst this particular report and recommendations relate more to public-interest companies, so listed companies and insurance companies, and they don't have such a direct impact on asset managers, they emphasize the importance of these issues, at the European level.

So what issues was the report trying to address? I think they can be summarized in, probably, a few areas. The first one was that the report highlighted some deficiencies with some of the existing EU legislation, particularly in relation to non-financial reporting and how that interacts with ESG issues. Secondly, the report thought that there is a lot of focus on short-term investment pressure, and that leads to an excessive focus on the need to have immediate profit extraction which just isn't compatible with companies' sustainability goals. The other area of focus, which the report highlighted, was that institutional investors need to engage more in relation to ESG issues and so it highlighted that as well.

And so what were the recommendations that the report set out? These can be summarized in three key areas. The first one was amending existing EU-wide legislation and, in particular, the Non-Financial Reporting Directive. This is something that is already being reviewed at the European level, but the report highlighted that it should focus more on ESG disclosures and ensure that they include binding measures in relation to ESG. The second recommendation that the report made was in relation to promoting an international set of standards in relation to ESG. And lastly, the report wanted to see non-financial matters and disclosures included in the financial reports, and that would require that non-financial information to be checked by external auditors. So they were the key three recommendations. In addition, and as I mentioned earlier, there was also a focus on institutional-investor engagement. The report looked at potentially expanding the “White List” to allow institutional investors, in certain companies, to be able to engage on ESG issues without necessarily breaching the Takeover Code. There was also reference in the report to institutional shareholders being able to vote on the non-financial information that was included in the financial reports.

So what happens next? The European Commission will consider the report. They'll look at the recommendations and assess whether or not any changes need to be made to existing legislation or, indeed, whether any new legislative reform needs to be proposed. So at this stage, it's very much watch this space. But as I mentioned earlier, it really does show and emphasize the importance and the focus that the European regulators have in relation to sustainability and ESG issues. This will continue to be relevant and will impact the asset management industry, albeit it not directly in relation to this report, but certainly, by other measures that are going to be put in place during the course of this year and next.

Thank you very much for listening. I hope you enjoyed this podcast. Please do get in touch, if you have any queries. And please feel free to subscribe to the series, using your usual podcast downloads on either Apple, Google or Spotify. Thanks very much.

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