EU watchdog calls for crack down on 'short termism' in markets

LONDON (Reuters) - The European Union should give shareholders a vote on whether companies are paying adequate attention to “sustainability” factors such as climate change, the bloc’s securities watchdog said on Wednesday.

The European Securities and Markets Authority (ESMA) looked at ways to tackle “short termism” in markets and the failure of some companies, banks and asset managers to look at the long-term sustainability of their investment decisions and actions.

Encouraging institutional shareholders to be more active in companies they invest in can maximise long-term value, ESMA said.

“The short-term performance pressures on companies can result in an excessive focus on immediate profit extraction hindering them in meeting sustainability goals,” ESMA said in a report for the bloc’s executive European Commission, which has powers to propose changes to EU laws.

“We need to ensure that firms move to a long-term approach towards more sustainable finance while factoring in the risk climate change carries.”

There should be a single set of international standards for environmental, social and governance or ESG disclosures by companies, ESMA said, referring to benchmarks that are being more closely watched by investors.

As a first step the EU could adopt general principles to impose greater consistency in ESG reporting inside the bloc, ESMA said.

The so-called “white list” of activities that shareholders could cooperate on without breaching takeover rules could be amended to allow coordination on issues like ESG, ESMA said.

It should be mandatory for companies to include non-financial statements on issues like sustainability in their annual reports, meaning they would be checked by outside auditors, ESMA recommended in its report.

Shareholders of a company could also be given a vote on non-financial information as they currently have on executive pay, it added.

ESMA said the generally short-term focus of banks’ research on stocks is a “key driver of short-termism” and should be addressed by the European Commission in its review of the EU’s MiFID II securities rules.

The EU executive should also consider forcing EU member states to have an adequate independent framework in place to monitor how companies disclose pay of top executives, ESMA said.

But due to the substantial remuneration rules for investment funds which have been put in place in recent years, immediate legislative action is not warranted in this area, ESMA said.

There is also no need at present for tougher rules on short selling, securities lending or high frequency trading, it added.

Reporting by Huw Jones; Editing by Hugh Lawson