The European Commission Action Plan: An assessment of the reform areas for PRI signatories provides an overview of the main areas of reform. Action 10 focuses on fostering sustainable corporate governance and attenuating short-termism in capital markets.

Key points

  • To promote corporate governance that is more conducive to sustainable investments, the Commission will carry out by mid-2019 analytical and consultative work with relevant stakeholders to assess: (i) the possible need to require corporate boards to develop and disclose a sustainability strategy, including appropriate due diligence throughout the supply chain, and measurable sustainability targets; and (ii) the possible need to clarify the rules according to which directors are expected to act in the company’s long-term interest.
  • The Commission invites the European Supervisory Agencies (ESAs) to collect evidence of undue short-term pressure from capital markets on corporations and consider, if necessary, further steps based on such evidence by early 2019. More specifically, the Commission invites ESMA to collect information on undue short-termism in capital markets, including: (i) portfolio turnover and equity holding periods by asset managers; (ii) whether practices in capital markets generate undue short-term pressure in the real economy.


This action is non-legislative and is reflective of the HLEG concerns regarding corporate culture in the financial sector and the need for it to be better aligned with long-term considerations. Norms and values need to deliver on the promise of a sustainable financial system that benefits society.

For investor stewardship to be effective, it is essential that the consideration of sustainability risks and opportunities becomes an integral part of the way in which the investee companies are governed. Hence, the HLEG proposed that a clear commitment to sustainability is embedded in the duties of company directors and into the governance rules related to company management, supervision and incentive structures. The HLEG final report outlines a list of potential actions – “rather than designing a fully-fledged European corporate governance code ” – including updating the “fit and proper” tests to include an assessment of the individual and collective ability of the members of governing bodies in financial institutions to address sustainability risks.

There is no mention in the action plan of the expert group on technical aspects of corporate governance, established by DG Justice in 20179. That group provides technical advice to the Commission on technical aspects of listed company corporate governance, including on the use of modern information and communication technologies in corporate governance.

If they do not already, investors should incorporate the corporate governance recommendations in their active ownership practices. Most investors will already monitor portfolio turnover and holding periods. Investors might also want to consider how they incentivise investment decision-making consistent with the investment time-horizons of their clients.

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    The European Commission Action Plan: An assessment of the reform areas for PRI signatories

    August 2018