Helene Winch, PRI Director of Policy and Research said, “The European Commission has recognised that excessive short-term risk in capital markets contributes to financial instability, with insufficient engagement in investee companies.”
The directive states, “there is clear evidence that the current level of monitoring of investee companies and engagement by institutional investors and asset managers is inadequate.”
The directive requires asset managers to ‘report or explain’ on whether incentives align with the profile and duration of liabilities; whether asset managers make investment decisions based on medium to long-term company performance, including non-financial performance; how asset manager evaluation takes long-term absolute performance into account as opposed to performance relative to a benchmark index; and the duration of the arrangement with the asset manager.
Asset managers must also disclose the level of portfolio turnover, the method used to calculate it, portfolio turnover costs and an explanation if the turnover exceeded the targeted level.
Winch added, “the directive makes a strong case for medium to long-term investing as a viable alternative to short-term risk taking. There is a growing evidence base to support the fact that long-term responsible investment strategies are both better for financial markets as well as investors resulting in stronger portfolio companies and superior returns.”
This directive will now be considered by the European Parliament.