Businesses around the world are facing increased pressure to enhance their ESG oversight while maximizing shareholder value creation, and European companies are no exception.
In their Corporate Governance in 2023 report, Insightia, a Diligent brand, explores how the cost-of-living crisis, combined with new regulatory developments like the Corporate Sustainability Reporting Directive (CSRD), are pushing ESG to the top of the priority list for institutional investors.
“Recent regulatory developments are set to revolutionize the way issuers oversee and report on ESG-related risks, as well as how investors engage with companies on these pertinent topics,” said Josh Black, Editor-in-Chief at Insightia. “2023 is also set to be a busy year for activism, with undervalued companies and rising inflation providing many an attractive activist target.”
Emissions reporting is no longer optional
The official passing of the CSRD in November 2022 ushered in a new era of ESG accountability, requiring impacted companies in the EU to not only comply with forthcoming European Sustainability Reporting Standards, but also obtain certified third-party audits of their reports.
Companies already subject to the EU’s existing Non-Financial Reporting Directive (NFRD) will need to comply with the standards beginning in 2024, with initial reporting due in 2025. Other large businesses will need to comply by 2025, with the first reports due in 2026.
Insightia’s report, produced in association with White & Case and Alliance Advisors, also found that shareholders are becoming “increasingly vocal about the financial sector’s continued financing of fossil fuels” through the filing of shareholder proposals and lawsuits.
Investors are calling out excessive CEO pay plans
Institutional investors are also demonstrating renewed interest in ESG by calling out CEO pay plans that do not align with broader employee compensation and rising inflation.
According to the report, in 2022, FTSE 350 executive pay hit record highs, with total CEO realized pay averaging 3.03 million pounds.
Investor focus on ESG has also been evident in shareholder proposals that address human rights and employee welfare. Many of these proposals demand a Real Living Wage, a UK wage rate based on the cost of living.
Activists push to sell undervalued companies
As rising interest rates and inflation limit growth options, shareholder activists in Europe are increasingly demanding the sale of undervalued companies in order to unlock more value creation opportunities.
According to Insightia, 15 companies faced demands for a sale and/or acquisition of a third party in 2022, up from 13 in 2021.
Meanwhile, only 15 companies faced opposition to M&A transactions, compared to 29 in 2021.
How can European directors prepare for new risks and regulations?
“With Europe’s penchant for more behind-closed-doors activism, there is the potential for more of today’s campaigns to become public board battles further down the road, especially in markets that allow investors to call shareholder meetings outside of proxy season,” writes Black.
With a 360-view across their company’s data, business leaders can identify red flags quickly and mitigate risks effectively, leaving the organization less vulnerable to shareholder activism threats.
For a closer look at activism trends in Europe and what directors can do to prepare for the year ahead, download Insightia's full Corporate Governance in Europe report.