Short-termism: ESMA seeks feedback on financial sector-related, short-term pressures on corporations

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Short-termism: ESMA seeks feedback on financial sector-related, short-term pressures on corporations

28 June 2019

Regulatory News Alert

Context and objectives

On 24 June 2019, the European Securities and Markets Authority (ESMA) launched a consultation to gather evidence on potential short-term pressures stemming from the financial sector and causing corporations to apply a rather short-term, instead of long-term, view. The consultation follows up on the European Commission’s action plan, Financing Sustainable Growth from March 2018, in which a report by each of the three European Supervisory Authorities (ESAs) on potential undue short-termism was requested.

The Commission’s mandate suggests that decisions taken by corporations may not fully reflect long-term aspects required to put the EU economy on a path towards a more sustainable one. In particular, some companies may under-invest in long-term value drivers and overlook environmental and social objectives that require a long-term orientation. Thus, to promote sustainability in the EU, a context where incentives, market pressures, and a prevailing corporate culture that prompts market participants to focus on near-term performance at the expense of mid- to long-term objectives, should be avoided.

In light of the consultation, ESMA invites investors, issuers, UCITS management companies, self-managed UCITS investment companies, AIFMs, and the trade associations of financial market participants to respond to its questionnaire and help ESMA analyze the potential sources of undue short-termism on corporations. The objective of the exercise is to identify areas in which existing rules may contribute to mitigating undue short-termism and areas where the rules may exacerbate short-term pressures.


Six areas of investigation

ESMA’s questionnaire comprises several sections, seeking feedback on the following six main areas of investigation:

  1. Investment strategy and investment horizon: ESMA seeks information on the key features and the focus of the investment strategy as well as on the time horizon(s) that corporations use in their business activities. 
  2. Disclosure of environmental, social and governance (ESG) factors and the contribution of such disclosure to long-term investment strategies: ESMA intends to gain insights on the experience of retail and institutional investors with disclosure on ESG factors. 
  3. The role of fair value in better investment decision-making on long-term investment purposes.
  4. Institutional investors’ engagement: ESMA welcomes feedback on institutional investors’ experiences and views on whether and how they monitor the long-term value. ESMA points to the role of the recently applicable Second Shareholder Rights’ Directive (SRD II) as it seeks information on how engagement activities are put in place at the time of the publication of the questionnaire based on the current regulatory framework in the relevant Member States.
  5. Remuneration of fund managers and corporate executives: ESMA assesses whether remuneration of fund managers and corporate (investee) executives may be a driver of short-termism.
  6. Use of Credit Default Swap (CDS) by investment funds: ESMA intends to examine whether the holding of positions in CDS by funds could potentially drive short-termism.

ESMA’s questionnaire is presented in EUSurvey, the European Commission’s online survey making tool, and is open until 29 July. By December 2019, ESMA should deliver a final report to the European Commission based on its findings, and with the potential for regulatory action in the form of a Directive or Regulation.


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