Key Governance Developments - December 2022 (Wrap up)
Directors experience challenging year as sustainability aspirations meet messy geopolitical and economic reality

Corporate boards of directors have faced an unexpectedly challenging year, with Russia's invasion of Ukraine in February overturning established geopolitical assumptions and the world's energy market, and disrupting sectors ranging from retailing to food supplies and raw materials to technology. The early months of the year saw a rush by large international groups to step away from their operations in Russia; meanwhile surging inflation prompted central banks to increase interest rates to levels not seen in more than a decade. Soaring energy costs have put pressure on governments' and companies' sustainability commitments; so has a backlash in the US by politicians in some Republican-dominated states against financial institutions perceived to be denying investment to fossil fuel companies. With recession looming in major economies and energy supply issues still pressing, 2023 does not seem likely to offer much respite.

Key Governance Developments

Companies set to face new reporting responsibilities under EU sustainability disclosure rules

As many as 50,000 companies throughout the EU will be required to provide more detailed information on the sustainability of their activities within the next two years and obtain certification through an independent audit under the Corporate Sustainability Reporting Directive. From the beginning of 2024 the legislation will require companies to provide transparency on the sustainability of their business for the previous financial year. At present some 11,700 large companies and groups across the EU are subject to the requirements of the 2014 Non-Financial Reporting Directive, but the new law will extend the obligation to all large European companies - those that meet at least two criteria out of 250 employees, €20m balance sheet and €40m in turnover. It will also apply to all companies listed on regulated European markets.

Best source: European Council

Shareholder voting is ensuring companies adhere to climate action commitments: Candriam

Shareholders are increasingly using their voting rights to ensure that companies adhere to their climate change commitments, according to Luxembourg-headquartered investment manager Candriam. ESG analyst Sophie Deleuze-Duvielguerbigny says shareholders are increasingly voting on executive remunerations as well as other social impact, governance and environmental issues. Candriam representatives attend 1,200 company general meetings annually and vote on nearly 16,000 resolutions as part of its ESG focus.

Best source: Delano

Missed ESG goals represent operational and financial risk for companies and investors: study

Companies that miss their ESG targets face increased operational and financial risks, rather than just reputational damage, according to a survey by Dun & Bradstreet. Negative ESG performance on the part of companies as well as their suppliers, partners and distributors has had a negative effect on business for 81% of respondents. Achieving sustainability targets allows companies as well as investors to identify growth opportunities earlier and increase revenue and profit, according to the data and analytics firm.

Best source: Environment Analyst

Italian banks complain about ECB presence at board meetings

The European Central Bank has drawn criticism from Italian bank executives over what they see as an excessively intrusive approach to involvement in their daily activities, including ECB officials insisting on attending board meetings, according to Italian Banking Association president Antonio Patuelli. Société Générale chairman Lorenzo Bini Smaghi recently issued a similar complaint about the ECB’s approach.

Best source: Reuters (free registration)

European Court of Justice may have to rule on competition guidelines affecting companies’ climate agreements

European Commission guidelines on anti-competitive sustainability agreements between companies to lower their carbon emissions are too restrictive, according to Martijn Snoep, chairman of the Dutch Authority for Consumers and Markets. He says businesses may need to challenge the guidelines before the European Court of Justice, or otherwise they and their boards of directors could face liability for harming consumers through higher prices or lower quality goods and services. The EU guidelines provide some safe harbour protection, Snoep argues, but they are too rigid and could result in regulatory penalties or prosecution if companies conclude agreements to reduce emissions, packaging or the use of toxic chemicals.

Best source: Financial Times (subscription required)

Women remain under-represented in senior European banking posts: DBRS Morningstar

Women occupied just over a quarter of European banking executive posts and 37% of board positions last year, up from 20% and 35% respectively in 2020, according to DBRS Morningstar. In Denmark, women account for 55% of board positions, but in Germany the figure is only 29% and in Portugal just 23%. The survey finds only five institutions — NatWest and Nationwide in the UK, Norway’s DNB, Handelsbanken in Sweden and Bank of Ireland — which had female CEOs in 2021, although it did not cover Luxembourg, where Colette Dierick headed ING up to June this year and Françoise Thoma has been CEO of Banque et Caisse d'Épargne de l'État since 2016.

Best source: Financial Times (subscription required)

See also: Bloomberg (subscription required)

See also: DBRS Morningstar

EU ministers back exemption for banks and funds from reporting supply chain human rights and environmental breaches

EU ministers have backed an exemption for banks and investment funds from reporting requirements under the planned Corporate Sustainability Due Diligence Directive that would require them to investigate and publish details of human rights and environmental breaches in their supply chains. The directive will apply to companies with more than 500 employees or global turnover exceeding €150m, but France, Spain, Italy and Slovakia have successfully argued that the financial sector does not have supply chains in the same way as companies that manufacture goods.

Best source: Financial Times (subscription required)

UK businesses, trade unions and environmental groups warn against scrapping EU laws

Businesses, trade unions, environmental groups and business sector organisations have complained about the UK government's intention to annul automatically legislation retained from Britain's membership of the EU by the end of next year, part of a strategy of reducing the country's legal alignment with Europe after Brexit. The Institute of Directors, Trades Union Congress, Chartered Institute of Personnel and Development, Employment Lawyers Association, Civil Society Alliance and other organisations have warned business minister Grant Shapps that the Retained EU Law Bill will cause confusion and disruption for businesses, workers, consumers and environment activists.

Best source: Financial Times (subscription required)

Audit firms say US corporate governance is in decline: survey

The quality of US corporate governance has fallen over the past year, receiving an average B- score in the American Corporate Governance Index survey of audit firm CEOs. The Institute of Internal Auditors' report finds that companies earning A ratings for governance fell from 19% in 2020 to 14% last year, while the average company score fell from 82 out of 100 to 81. The researchers note that shareholder communications and meetings, as well as employee ethical training, have been disrupted by the Covid-19 pandemic, but say companies have been slow to respond to concern about environmental, social impact and governance issues among a growing range of shareholders.

Best source: Accounting Today (subscription required)

BlackRock to enable UK retail investors in pooled funds to vote on AGM resolutions

BlackRock is to pilot a scheme enabling retail investors in UK pooled funds to vote their shares individually on contested portfolio company AGM resolutions from next year, following the introduction of a similar system for institutions in markets such as the US. Institutional investors with $452bn in assets have already used the fund manager’s Voting Choice programme, which will be extended to retail investors in Britain using digital platform Proxymity.

Best source: Financial Times (subscription required)

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