The European Securities and Markets Authority (ESMA) has published its findings on potential undue short-term pressures in securities markets. The European Commission (EC) had asked the three ESAs (ESMA, EBA and EIOPA) to investigate potential sources of undue short-termism on corporations and provide advice on areas which regulators should address.
In the report, ESMA makes recommendations to the EC for action in key areas, such as:
- disclosure of Environmental, Social and Governance (ESG) factors including:
- amending the Non-Financial Reporting Directive (NFRD);
- promoting a single set of international ESG disclosure standards;
- requiring the inclusion of non-financial statements in annual financial reports; and
- institutional investor engagement including:
- a review of the White List under the Takeover Bids Directive;
- a potential shareholder vote on the non-financial statement; and
- monitoring the application of the Shareholder Rights Directive (SRD II).
ESMA, based on the evidence collected, recommends improvements in issuers’ ESG disclosures which should respect a minimum level of comparability, relevance and reliability. ESMA recommends that the EC considers appropriate amendments to the NFRD to establish principles for high quality non-financial information along with a limited set of specific disclosure requirements.
In parallel, ESMA also recommends that the EC assesses the feasibility of achieving international convergence and consolidation of relevant disclosure frameworks with the objective of promoting, in the medium term, the adoption of a single set of international standards for ESG disclosures.
ESMA also proposes including the non-financial statement in issuers’ annual financial reports and mandating assurance on its content and consistency with other information in the annual financial report. It also recommends establishing consistency between the NFRD and the Transparency Directive, a key element to improve reliability of ESG disclosures.
Institutional investor engagement
In order to further facilitate engagement taking into account long-term objectives, ESMA recommends that the EC mandates a review of the White List, namely ESMA’s public statement on shareholder cooperation and acting in concert under the Takeover Bids Directive.
ESMA suggests that the EC considers the effectiveness of a shareholder vote on the non-financial statement to allow investors to express their views on how investee companies address sustainability risks. In addition, ESMA suggests monitoring the application of the revised SRD II in order to assess whether it effectively encourages long-term engagement.
Securities lending and short selling
ESMA has considered the general arguments in relation to the impact of short selling and securities lending practices and their potential link with short-termism. Nevertheless, ESMA points out that short selling and securities lending are key for price discovery and market liquidity. Moreover, ESMA is not aware of concrete evidence pointing to a cause-effect connection between these practices and the existence of undue short-term market pressures.
Additionally, the Short Selling Regulation foresees the right of NCAs and ESMA to adopt emergency measures that may even restrict the capacity of market participants to sell short financial instruments temporarily where a threat to the financial stability or to market confidence may exist. ESMA is minded, therefore, not to recommend policy adaptations or changes in these areas, especially considering that the legislative framework provides for specific transparency requirements in the case of short-selling and securities lending.
ESMA’s report has been sent to the EC which will decide whether to initiate legislative changes to address the report’s recommendations and monitor the effect of certain legislative acts to assess whether there is a need for further action.