UK CEOs ‘not incentivised’ to focus on their environmental impact

By Gavin Hinks

executive pay, pay, remuneration, pay ratios, corporate governance, finance

Are chief executives rewarded for tackling the climate crisis? Not in the UK it seems. In fact, far from it.

Research from remuneration experts at Vlerick Business School in Ghent has found that UK CEOs are not incentivised to make their businesses environmentally friendly. Indeed, analysis of 159 UK companies found that just 6% of their chiefs have a KPI focused on the environment. Less than 1% have long-term incentives focused on this area.

That will comes as a shock to many in the week that the world’s climate emergency efforts are focused on the COP25 meeting in Madrid and working out how the Paris climate agreement will be put into operation.

Xavier Baeten, a professor at Vlerick, said the climate crisis may have been accepted by big business as a reality, and many acknowledge they have to play a role in reducing their harmful practices. But this has yet to feed into pay arrangements in any significant way.

“There is a general consensus in business, certainly among larger firms, that there is a climate crisis and that different stakeholders have to play a role in becoming part of the solution,” said Baeten.

“They now understand how their practices are impacting the environment, and are actively looking to implement initiatives that focus on being more environmentally friendly.

“However, our research shows that for the overwhelming majority of UK firms, there is no incentive for the top CEOs to enact these environment-focused initiatives and policies.”

Baeten says government intervention on pay may not work and that it would be more effective if companies reflect on exactly how the climate will affect their businesses, develop appropriate sustainability strategies and only then put in place the right KPIs.

Focus on returns

The research showed that just 21% of UK chiefs executives worked with a long-term incentive that included elements unrelated to the profit of the company, or returns for shareholders.

Despite all recent talk of stakeholder engagement and companies becoming “purposeful” businesses, Vlerick concludes that UK CEOs are “much more strongly steered towards uplifting the share price compared with other countries”.

Investors have focused enormous engagement efforts on excessive pay and adjusting business models to take account of climate risk. However, the associated incentives for CEOs have generally been passed by.

That may change. There are efforts to have more companies report according to guidelines issued 2017 by the G20s Task Force on Climate-related Financial Disclosures. Exposure to the the glare of publicity caused by those reporting principles could compel boards to adjust incentives too.

If not, it’s highly likely the pressure will eventually come from investors again.

Ironically, COP25 saw the the UN secretary general, António Guterres, comment that national governments were doing too little to help business.

“I’m meeting more and more business leaders that complain that they cannot do more because governments will not allow them to do so, because of the environment that is still created in the bureaucratic, administrative, tax regulatory and other frameworks that are under government control.”

Many will view that a let-off for companies who could take their own action now, such as Baeten points out, in reviewing their sustainability strategies.

Despite much activity on climate, Vlerick’s research demonstrates that business is still grappling to integrate the consequences of global warming into all processes. Time to move a little quicker.

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UK CEOs ‘not incentivised’ to focus on their environment impact

By Gavin Hinks

executive pay, pay, remuneration, pay ratios, corporate governance, finance

Are chief executives rewarded for tackling the climate crisis? Not in the UK it seems. In fact, far from it.

Research from remuneration experts at Vlerick Business School in Ghent has found that UK CEOs are not incentivised to make their businesses environmentally friendly. Indeed, analysis of 159 UK companies found that just 6% of their chiefs have a KPI focused on the environment. Less than 1% have long-term incentives focused on this area.

That will comes as a shock to many in the week that the world’s climate emergency efforts are focused on the COP25 meeting in Madrid and working out how the Paris climate agreement will be put into operation.

Xavier Baeten, a professor at Vlerick, said the climate crisis may have been accepted by big business as a reality, and many acknowledge they have to play a role in reducing their harmful practices. But this has yet to feed into pay arrangements in any significant way.

“There is a general consensus in business, certainly among larger firms, that there is a climate crisis and that different stakeholders have to play a role in becoming part of the solution,” said Baeten.

“They now understand how their practices are impacting the environment, and are actively looking to implement initiatives that focus on being more environmentally friendly.

“However, our research shows that for the overwhelming majority of UK firms, there is no incentive for the top CEOs to enact these environment-focused initiatives and policies.”

Baeten says government intervention on pay may not work and that it would be more effective if companies reflect on exactly how the climate will affect their businesses, develop appropriate sustainability strategies and only then put in place the right KPIs.

Focus on returns

The research showed that just 21% of UK chiefs executives worked with a long-term incentive that included elements unrelated to the profit of the company, or returns for shareholders.

Despite all recent talk of stakeholder engagement and companies becoming “purposeful” businesses, Vlerick concludes that UK CEOs are “much more strongly steered towards uplifting the share price compared with other countries”.

Investors have focused enormous engagement efforts on excessive pay and adjusting business models to take account of climate risk. However, the associated incentives for CEOs have generally been passed by.

That may change. There are efforts to have more companies report according to guidelines issued 2017 by the G20s Task Force on Climate-related Financial Disclosures. Exposure to the the glare of publicity caused by those reporting principles could compel boards to adjust incentives too.

If not, it’s highly likely the pressure will eventually come from investors again.

Ironically, COP25 saw the the UN secretary general, António Guterres, comment that national governments were doing too little to help business.

“I’m meeting more and more business leaders that complain that they cannot do more because governments will not allow them to do so, because of the environment that is still created in the bureaucratic, administrative, tax regulatory and other frameworks that are under government control.”

Many will view that a let-off for companies who could take their own action now, such as Baeten points out, in reviewing their sustainability strategies.

Despite much activity on climate, Vlerick’s research demonstrates that business is still grappling to integrate the consequences of global warming into all processes. Time to move a little quicker.

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Survey launches to reveal boardroom risk thinking

By Gavin Hinks

risk management

The Board Agenda Leadership in Risk Survey has been launched today in partnership with Mazars, the international auditing and accounting firm. The research and subsequent report is also produced in association with the INSEAD Corporate Governance Centre.

The survey will provide a significant insight into risk thinking and preparedness among European companies and the role of the board in placing risk at the centre of corporate decision making.

The risk landscape has changed dramatically in recent years with the advent of climate as an existential threat, the evolution of new technologies, growing political uncertainty and the prevalence of cybercrime.

The survey aims at revealing the action board members are taking to provide effective oversight in an age of unprecedented risk, and whether boards also see the opportunities in the risks before them.

The survey and report will examine the level of skills present in the boardroom to manage appropriate risks, the governance structures built around risk management and the planning that goes into confronting significant risks and opportunities.

The report will also look at the nature of risk appetite, how it is defined, and how “risk culture” inside organisations is monitored and reviewed. We also ask how risk is reflected in the structure of executive incentives.

In addition the survey seeks to explore readiness for specific risks such as geopolitical change and uncertainty, cybersecurity, reputation and climate change.

Risk and its management is a major issue for boards and investors. This survey will help illuminate the priority given to risk in the boardroom.

Take part in the survey and provide your insight on this critically important issue.

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Be proactive with shareholder engagement to avoid damaging disputes

By Sheryl Cuisia

activism, activist, investors, shareholder engagement

Corporate governance remains high on the business agenda. The media spotlight on the impact of business on the environment has sharpened while perennial boardroom issues such as executive remuneration and director overboarding continue to cause unease with shareholders amidst an uncertain macroeconomic climate.

However, changes in UK company law and the UK Corporate Governance Code have now empowered dissatisfied shareholders more than ever before. Resolutions which receive more than 20% of votes against require the company to explain what actions it will take to engage shareholders to comprehend the reasons behind the negative reaction. It also necessitates an update on shareholder feedback and further actions taken within six months and final summary in the annual report.

Investors therefore can cause concrete change through their voting, forcing companies into action over issues that they may be dragging their heels on. The balance of power has shifted and companies must react accordingly to maintain the highest standards of corporate governance and avoid damaging disputes with their own shareholders.

Areas of dispute

Resolutions put forward for approval at the AGM are increasingly vulnerable to investor protest votes, with six “close calls” (vote is within 10% of the required majority) in the FTSE 100 and 19 in the FTSE 250 through the past AGM season. Six votes were also lost among FTSE 350 companies over the period.

The authority to allot shares on a non-pre-emptive basis saw the most close calls, followed by remuneration policy or report and the ability to hold general meetings on not less than 14 days’ notice.

Shareholder activism has seen a notable increase over recent years, a trend we expect to see continue through 2020

In addition, for nearly a third (31%) of the companies surveyed, directors’ resolutions received the lowest votes in favour out of all resolutions put to the meeting. This indicates that there is a clear willingness to hold the board and its directors to account, and ensure they have both the time and commitment to carry out their duties.

Shareholder activism has seen a notable increase over recent years, a trend we expect to see continue through 2020. There are two strands to activism—”overt” activism which is driven by specific activist funds, and “covert” governance-related activism which is driven by traditional institutional investors as responsible stewardship.

The UK remains a hotspot for activism due to long-established procedures of companies engaging with their main institutional investors as encouraged by the Stewardship Code and transparency around shareholder data.

Activism typically relates to governance issues, M&A, operational improvement or problems around the balance sheet however nearly all the time the resolutions proposed are in relation to the removal of existing directors or the addition of new directors.

This is because passing an ordinary director removal or election resolution is easier than a special strategy-related resolution that requires a super majority of 75%.

Company recommendations

Shareholder engagement is not a “box-ticking” exercise, nor is it a process that can be left—comfortably—to the last minute. Investment managers and corporate governance and stewardship teams are working more closely together than ever before.

It is crucial that companies prepare suitably for their AGM, a process that must start long before the meeting to avoid last-minute firefighting. Visibility and proactive shareholder engagement will be the key to quelling any investor dissent and getting the company on the front foot.

Shareholder dissent is no longer an exception, it is the new normal

On the basis of this conclusion, we offer these recommendations to UK companies in the run-up to the 2020 AGM season:

  • Companies should conduct a year-round process of corporate governance engagement with shareholders, aligned to the financial calendar and investor relations programmes;
  • Proxy advisers remain a vital constituent within corporate governance engagement. Companies should be aware of the recommendation frameworks employed by the key advisers in the same way that their policies are aligned to the strategies used by key shareholders;
  • Good and improving corporate governance performance should be highlighted throughout the financial calendar, arguably placed within a demonstrable framework that sets out key policies and benchmarks;
  • Engagement should be conducted by key non-executive members of the board and committees. Proactive shareholder engagement should be a component part of the job description of these members rather than an optional extra;
  • Employee representation is likely to be a focus for shareholders going forward. Resolutions and policy relevant to this point should be carefully considered and particular attention should be given to the experience and job descriptions of the nominees;
  • Non-executive director nominations should be supported by detailed biographies, highlighting the relevant expertise now required by the Stewardship Code and which are aligned to a transparent skills matrix;
  • In the event of likely shareholder dissent at 20% or more for a resolution, UK businesses should not only engage quickly and actively with shareholders but prepare for the potential to be placed on the Public Register—specifically to align the reporting process with the financial calendar.

Shareholder dissent is no longer an exception, it is the new normal, and so against an increasingly volatile equity capital market, poor corporate governance could impact shareholder value as much as weak financial results.

Sheryl Cuisia is founder and managing director of Boudicca Proxy Consultants and a judge for the NED Awards 2020.

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Want to do business in Germany? Make sure you know the rules

By Guest Contributor

Doing business in Germany

As uncertainty over Brexit continues, it’s no surprise to learn that British companies are looking to set up shop abroad. One popular destination is Germany.

Indeed, Christian Krumb, head of legal at international administrative support services provider TMF Group, says the firm has fielded a barrage of calls in the past year from British businesses seeking to set up a properly constituted subsidiary in Germany to ensure they have a foothold on the continent.

“There’s a big drive under way to establish real German subsidiaries, especially from companies that currently only have a branch here,” says Krumb.

“Germany remains an attractive place to operate, the fundamentals are good. But setting up a business is demanding. There are a lot of statutory regulations to comply with and to the outside world this can seem both complex and arcane.

“But company formation is highly structured. The pathway to setting up has a clearly defined process.”

TMF Group’s Global Business Complexity Index 2019 places Germany in the top ten most complex jurisdictions in which to do business. The report observes that it is often easier for local firms to incorporate than foreign-owned businesses.

Globally the main reasons for complexity can come from hard-to-navigate rules and regulations, frequently changing legislation and employment processes. In Germany the drivers of complexity stem from the tricky process of setting up a business, accounting rules and the country’s notoriously difficult tax code. But companies must also confront the rigour applied by banks when vetting new customers.

It can all add up to a challenging exercise. With the right guidance however, it can be navigated with confidence.

A slow process

The basic process does not appear intimidating: businesses must choose a company type, a company name, execute a deed of formation, deposit share capital and then register the company on the commercial register.

But all of these stages may come with quirks that newcomers to Germany may find challenging, especially if they come from jurisdictions that have moved to accelerate and automate company formation as much as possible.

Perhaps the first issue to note is that company creation may take longer in Germany than in many other countries. Indeed, establishing a new limited company from start to finish can take from four to eight weeks, a period that may leave those used to speedier time frames somewhat frustrated.

Large parts of the registration process have to be undertaken physically and in hard copy

What makes it so slow? Though it may seem unlikely in the digital age, large parts of the registration process have to be undertaken physically and in hard copy. Paper forms have to be delivered to offices, and checked by real people. In the age of the internet and transactional websites, this may come as a surprise.

Firstly, establishing a GmbH (Gesellschaft mit beschränkter Haftung, or limited liability company) has to be completed in front of a notary who has to read aloud the deed of formation. This can seem quaint, but the issue of whether the deeds have been read out or not has proved the centre of legal contention in the past. Company founders must also prepare the articles of association. A representative of the founder must sign both deeds and the articles in front of a notary before company formation can move to the next stage.

New companies must be registered with the commercial register (Handelsregister). It’s worth pausing here to consider the unique nature of the commercial register. In contrast to territories where companies can be created in hours online, trained officials and lawyers check through the paperwork to ensure it has been completed correctly. And they take their time.

“The commercial register is not just somewhere you send a form electronically and then the company is registered,” warns Krumb.

“Judges and clerks review the integrity of the paperwork. It’s rather a difficult process to go through. When we are dealing with clients from the US, for example, this can come as something of a surprise. It can be difficult to explain how long the process takes.”

Banking

Perhaps the step that looms largest is the paying in of share capital. This can usually not be done without a bank account and dealing with German banks presents its own challenges.

To begin with, banks strictly enforce the Know Your Customer practices imposed by the European Anti Money Laundering Directive, updated in 2018.

“It is becoming increasingly difficult for foreign investors to open an account”

—Christian Krumb, TMF Group

But Christian Krumb says once the right information is in place, the regulation is relatively easy to manage. He says a trickier issue for companies seeking to do business in Germany is the general selectiveness local banks practice around accepting new clients. It is not unheard of for otherwise unblemished businesses and directors to struggle to be accepted as a banking customer.

“It is very important to have a business relationship with a bank,” says Krumb. “If you go to a bank and it doesn’t know you, it is almost impossible to open a bank account. We’ve seen this trend developing over recent years and it is becoming increasingly difficult for foreign investors to open an account.”

This is critical. Without a bank account it is impossible to deposit the share capital, a minimum of €25,000. And without that, impossible to register the company.

Luckily, advisers can help with building the necessary documentation and relationships that can expedite a warm welcome from a bank.

Accounting and tax

These are not the only thresholds to cross. Accounts must be completed in German GAAP and compiled on German soil. Dispensations are available for completing accounts abroad, but they are rare.

The German tax code makes its own demands. Tax law is “voluminous” says Krumb, and requires expert advice. Finding the right tax office can take time and officials require exhaustive documentation on the tax structure of the German entity and its parent company.

Dispensations are available for completing accounts abroad, but they are rare

Tax treatments can differ too depending on the location of the company’s named director. This places a premium on having someone local. That either means finding someone early to take on some of the heavy administrative lifting, or using a service that provides a director for the purpose of formation and until a company is ready to recruit a full-time director.

“You should appoint a resident legal director in Germany in order to facilitate the registration process,” says Krumb. “If not, your file could be handed over from one tax authority to another. And that delays the process substantially.”

Setting up a business in Germany may be slow, and the banks sensitive to who they take on, but with the right advisers the process can be negotiated and the inconvenience minimised.

“Germany remains one of Europe’s leading economies,” says Krumb, “and businesses want to be here, we have seen that.

“The formation process can look intimidating but it has its own logic and can be managed successfully.”

This article has been prepared in collaboration with TMF Group, a supporter of Board Agenda.

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Anti-bribery and corruption efforts ‘compromised’ by poor procedures

By Gavin Hinks

bribery and corruption

Last week the Swedish telecoms giant Ericsson was fined an eye-watering $1bn by US enforcers to settle bribery and corruption charges.

A statement from the US Department of Justice (DoJ) said the arrangement resolved an investigation into a company scheme to “make and improperly record tens of millions of dollars in improper payments around the world”.

“Ericsson’s corrupt conduct involved high-level executives and spanned 17 years and at least five countries, all in a misguided effort to increase profits,” said assistant attorney general Brian Benczkowski of the DoJ’s criminal division.

This week came another reminder that bribery and corruption involving big companies remains an ever-present issue. Research from specialist consultancy GoodCorporation revealed that of the anti-bribery and corruption (ABC) due diligence procedures it has examined, a hefty 53% were graded “inadequate”. Likewise, 40% of the anti-bribery and corruption risk assessments were also inadequate, with no improvement over a five-year period from 2014–2019.

The report said the findings suggest that many companies are leaving themselves open to bribery allegations and, as a result, prosecution.

Critical issues

The UK Bribery Act came into force in 2011. That improvements to risk assessment procedures should stall just four years later would suggest critical issues with how the problem is viewed by corporates. Companies accept they face risks, then take little action to confront them, according to Gareth Thomas, a director at GoodCorporation.

With little effort to identify where or how bribery and corruption risks might occur, steps to prevent corruption are “effectively compromised from the start,” said Thomas. Companies don’t appear to know what they are doing, he added.

“Over three-quarters of the companies in the bottom quartile of our data have failed to conduct appropriate anti-bribery risk assessments, suggesting a lack of understanding of how to conduct bribery risk assessments in many organisations.”

Due diligence hits the buffers when it comes to third parties. It’s not as if companies lacked case studies to use. Headlines in recent years have been filled with accounts of how companies such as Rolls-Royce have fallen foul of the law. After a four-year investigation, Rolls-Royce paid £497.25m to settle its corruption case with the UK’s Serious Fraud Office (SFO), as well as authorities in the US and Brazil.

The key to due diligence of third parties, according to Thomas, is to avoid targeting too many.

“The best strategy is to start by identifying the entities that pose the greatest threat, taking a risk-based approach which will ensure that anti-corruption due diligence is proportionate and manageable,” he said.

Corruption pays

GoodCorporation’s conclusions are in tune with research conducted by the University of Manchester and the law firm White & Case at the end of last year. The global survey found nearly a third—29%—of employees said their companies either had no bribery and corruption policy or they didn’t know if it did. A total of 48% of respondents believed that people who paid bribes on behalf of their companies would be rewarded internally, with promotion one of the likely benefits.

If employees generally believe that bribery and corruption pays, that presents rule-makers and business leaders with a difficult challenge.

The report argues more needs to be done to convince employees that the consequences of bribery and corruption can be severe and that powers for investigators and prosecutors have been beefed up in many jurisdictions around the world.

Dr Nicholas Lord, a professor of criminology at the University of Manchester, said: “With a raft of new legislation designed to tackle white-collar crime and extended powers awarded to regulators and law enforcement agencies globally over recent years, companies need to pay more attention than ever to ensuring internal compliance and systems are robust.”

When Ericsson reached its settlement, the company’s president and chief executive, Börje Ekholm, said: “This episode shows the importance of fact-based decision-making and a culture that supports speaking up and confronting issues.”

Culture is critical, but if GoodCorporation’s research is correct, too few companies have put it to use. Ericsson’s experience should serve as a warning.

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European agreement on sustainable business taxonomy divides opinion

By Gavin Hinks

European institutions have taken a step closer to agreeing definitions of what constitutes green business activity.

The end of last week saw the commission president and the European Parliament reach agreement on a “taxonomy” of sustainable economic activity, following a year of negotiations. The taxonomy still needs to be ratified by the Commission and the Parliament, but it looks like European regulators have settled a way of defining sustainable business activity for investors and lenders.

Commission president Valdis Dombrovskis tweeted: “A major success ahead of COP25 and for our sustainable finance strategy.”

The sustainable business taxonomy forms the core of the EU’s strategy to green financial activity across Europe to ensure it supports the fight against climate change.

However, not everyone is happy with the outcome. EuropeanIssuers, a body representing quoted companies across Europe, believes the final agreement includes regulatory measures that place new, unjustified burdens on companies. These include extension of the regulation to include an obligation for companies to report details of their turnover, CapEx and OpEx associated with environmentally friendly economic activity.

EuropeanIssuers disagrees that these new reporting demands will help investors. It believes there is little evidence that reporting these figures is relevant to investors’ need to comply with their own disclosure requirements on ESG (environmental, social and governance) factors.

“These reporting requirements were put forward by the Commission at a very late stage of the trialogue negotiations without any impact assessment,” said a statement from EuropeanIssuers.

“They will impose unjustified additional burdens for companies without guarantee that they will be useful and will put European corporates in competitive disadvantage vis-à-vis non-European competitors.”

Indeed EuropeanIssuers has called for a new dialogue to define new reporting requirements.

Defining products

The taxonomy is designed to be used by investors and forms a central plank of the EU’s sustainable finance strategy.
When offering green funds investors must report on how they’ve used the taxonomy to define their products.

The taxonomy has been a much anticipated part of the financial landscape given given widespread disparities on how fund managers define what is and isn’t sustainable or ESG-friendly.

The taxonomy has, in the past, provoked a mixed reaction. Will Martindale, director of policy and research at campaign group Principles for Responsible Investment, told investors at a Paris conference in October that it formed a welcome addition to the investment landscape even though it was “complex, but designed to deal with complexity”.

However, others have expressed clear doubts. The sceptics say the taxonomy could be too “strict”, its definitions too narrow, and therefore inhibit green investment.

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Designing a suitable taxonomy for a sustainable future

By Florence Bindelle

for The Sustainable Finance Action Plan is a milestone of the EU policy on issues relating to ESG and adaptation to climate change. A number of legislative proposals have accompanied the Action Plan in order to ensure that financial products are used to promote sustainable activity as the driving force for the EU’s transition to a greener economy.

The so-called taxonomy proposal sets the foundation for sustainable investments in the EU and the criteria for which activities are eligible to receive “green” investments by establishing a classification system in sustainable finance framework. In other words, the taxonomy proposal clarifies which economic activities can be considered environmentally sustainable to receive investments.

The challenge for the taxonomy is not to make finance greener, but to bring about a greener economy. Therefore, it should be designed as a tool to help companies grow and create jobs whilst facilitating the transition to a sustainable economy.

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In order to shape the taxonomy into an effective tool, the regulation needs to address several key issues. The first is the clarification of the term “environmentally sustainable activities”. It is extremely important for this concept to not exclude economic activities per se, but be an analysis of best environmentally sustainable performance for each activity.

This should go far beyond the activity level and, as was done in the EU Emissions Trading Scheme Directive (ETS Directive), measure the real performance indicators and benchmarks at company or installation level.

It is also important to better define the degree of granularity in technical screening criteria to avoid penalising a company using eco-sustainable technologies for engaging in economic activities that are not considered sustainable. This way, companies can find and integrate innovative solutions in order to enhance the sustainability of certain actions.

The integration of a forward-looking and inclusive approach to economic activities is another issue. Sustainable finance primarily aims to enhance a continuous transformation of “brown” activities into “green” activities. Alongside with using finance to further enhance green activities, meaning making green greener, EuropeanIssuers believes that a more effective taxonomy can be achieved by targeting less sustainable [projects???????]. If companies are to develop plans to turn “brown” activities into “green” ones, then they should be able to raise capital through sustainable finance.

The notion of transition to a green economy is important. Drawing up a list of brown or harmful activities would foster investors’ exclusion strategies and risk decreasing financing of large greenhouse gas emitters committed to get greener. These actors should not experience more difficulties to finance their transition even though they have the strongest environmental impact. This is what EuropeanIssuers means by transitioning to a green economy. It is essential to keep the focus of taxonomy on making the unsustainable sustainable.

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In addition to these key issues, other aspects must be considered to establish an effective taxonomy for sustainable finance. The taxonomy will help companies to grow and transition in a sustainable manner, but this must not be done at the expense of high administrative burdens. If too many obligations are included, the taxonomy could be quite expensive for companies.

Currently, the EU is in a clock race in order to meet the 2050 goal of net-zero emissions. EuropeanIssuers firmly believes that this can be achieved if the EU acts decisively and focuses on environmental factors. Due to the urgency of this matter, the proposal should maintain its original scope, which is limited to environmentally sustainable financial products. Although EuropeanIssuers supports minimum social safeguards, the focus of taxonomy should stay environmental only at this stage. The inclusion of social criteria in taxonomy is premature since it requires an in-depth analysis and identifying relevant indicators which need more time to be properly addressed.

EuropeanIssuers also supported the European Council’s approach in guaranteeing sufficient consultation of national experts through the creation of Member States’ Technical Expert Group, alongside the Sustainable Finance Platform, which would allow the European Commission to gather the necessary expertise. This could be vital to assess the implementation of these criteria, the outcome of their application by financial market participants and their impact on capital markets.
Another important point is that it is critical to involve non-financial companies in the dialogue with other stakeholders because they play a key role in energy transition and reporting processes. Their participation in the Sustainable Finance Platform should be strengthened to ensure a balanced and diverse stakeholder group. Furthermore, it means that companies can develop environmentally sustainable projects so as to create a positive impact for the European economy.

Other aspects of the taxonomy which would create unnecessary administrative burdens for companies include the requirement for third-party verification of compliance with the regulation. The “comply or explain” approach pushes corporates to declare that their financial product does not pursue sustainability objectives. Obliging companies to comply by the regulation or to explain would create an obstacle that companies would have to spend resources dealing with reporting and compliance rather than redirecting them to sustainable activities and growth.

Overall, EuropeanIssuers sees the potential benefits the taxonomy would bring to issuers if it is designed as a tool to help companies grow through the sustainable transition process. By ensuring that these aspects of the taxonomy are addressed, we will begin to see significant progress in transitioning to a more sustainable economy while fostering a healthy growth level for companies across the EU.

Florence Bindelle is secretary general and Frederico de Santos Martins is policy adviser at EuropeanIssuers.

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