The Power of the Retail Shareholder

*This blog was created as part of a Bachelors Thesis by Bronte Collins*

How ESG Policies can Benefit the Retail Investor

ESG makes for a more secure financial investment. This is due to the disclosure of non-financial material information which aids the assessment of any future risks, and accommodates the mitigation thereof. High scoring ESG investments have maintained greater resilience in times of economic uncertainty.

Environment, Social, Governance

Environment – If the goals of the Paris Climate Agreement are to be reached, this requires companies to take steps to mitigate their contribution.

Social – This may positively manifest as adherence to labour law at a local level or human rights standards broadly.

Governance – concerns itself with bribery and corruption related measures within the corporation.

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Disclosure & Due Diligence Requirements

The Corporate Social Responsibility Directive, for which the deadline for domestic transposition is mid 2024, is an evolution of the Non-Financial Reporting Directive and subsequently established sustainability requirements. A sustainability statement is a mandatory requirement imposed on companies as a result of this legislation, this should be found with the management report of the company. Hence, the publication of information related to sustainability is the central element of this directive.

The Corporate Sustainability Due Diligence Directive was adopted by EU Parliament in April 2024. This directive mandates that companies take steps to mitigate any negative impact associated with their activities. Hence, the legal developments have evolved from mere reporting to the requirement to act.

Class Action

The collective rights of retail investors, within the EU, are safeguarded by the Representative Actions Directive (EU) 2020/1828. This directive stipulates the retail investor rights which should be transposed into domestic legislation in every EU Member State. Where a public company engages in deceptive practices, for example greenwashing, which may negatively impact share price, this could entitle the retail shareholders impacted legal rights to initiate litigation.

Investment screening

There are 4 different types of investment screening for the purposes of assessing the ESG-ness of an investment:

  1. Negative Screening: this typically involves avoiding the five ‘sin’ industries. These include: armaments, tobacco, drugs causing abortion, pornography, and alcohol.
  2. Positive Screening: a method of investing which seeks to invest in companies with strong standards of environmental protection and the promotion and respect of human rights.
  3. Transversal Screening: an accumulation of both positive and negative screening to create an investment portfolio which prioritises “people, planet and profit”.
  4. Sustainable Investing & Shareholder Activism: involves both investing in companies that uphold high standards with regards to human rights protection and environmentally friendly in conjunction with active engagement through shareholder voice and vote at annual shareholder meetings.

What you should be asking your broker

The following includes some pre-formulated questions which you can send to your broker. These questions can be used at your discretion to ascertain a better understanding of the ESG screening practices that your broker employs.

[Pre-formulated Questions].

  1. What kind of screening do you use to assess an investment? Negative screening, positive screening, or an amalgamation of both?
  2. As a broker, do you engage in shareholder activism? If not, why? 
  3. Can you provide an example of a time in which you engaged in shareholder activism to benefit your customers (retail investors) or the environment/society?
  4.  Do you assess how an investment could be more ESG compliant and do you do anything to implement your findings?
  5. How do you raise concerns related to corporate adherence to human rights law when you are screening an investment? Or is this something that you would consider when screening an investment?
  6. How do you present information to potential investors so that they are fully aware of ESG impact of investment?
  7. How do you incorporate article 9 of the taxonomy regulation into your investment policy?
  8. Is ESG disclosure enough? Do you look for a strategy of implementation for this information?
  9. How do you diversify your portfolio to mitigate any risks that climate change may pose to market stability?

Outcome:

The response you receive from your broker, as a result of posing the above ESG related questions, should provide an indication as to the strength and thoroughness of their screening practices.