Alexandra Cain examines the worldwide state of shareholder transparency and asks international IROs whether a period of greater openness is getting under way
More timely disclosure of material and ESG information, gender parity on boards and short-selling are just some of the issues global regulators are exploring, as shareholders around the world push for better information about the assets they own.
The big-ticket global regulatory item this year, however, is new proposed global sustainability reporting standards. The International Sustainability Standards Board (ISSB), through its IFRS Foundation, is in the midst of a major project to streamline the sustainability reporting landscape.
The IFRS Foundation is taking ESG reporting standards that are already widely used in financial markets, such as the framework published and managed by the TCFD, and combining them into one system. Market participants understand one of the project’s aims is to reach a point where similar businesses are disclosing similar ESG information, so investors can compare like with like.
Most global market regulators are understood to be considering how this global initiative may be massaged for local conditions. While the rapidly changing global climate means there’s a sense of urgency behind this project, in reality achieving widespread global adoption of these standards in a short timeframe is going to be challenging.
Across the AtlanticUK regulators are canvasing numerous changes to improve both shareholder transparency and investor engagement.
‘Sustainability reporting is an area where both investor pressure and reporting requirements are increasing the breadth and detail of disclosure,’ says Laura Hayter, CEO of the IR Society in the UK. ‘Investors are seeking more information across the sustainability landscape, from climate accountability for individual directors to the implications of a just transition for natural and human capital and board diversity. The Financial Conduct Authority is also encouraging early reporting on its targets for women and ethnic minorities.’
There is increasing interest, too, in company remuneration in terms of alignment of executive pay with ESG strategy and the use of ESG metrics in light of the rising cost of living. The emphasis is on proportionate salary and pension increases in order to balance executive remuneration with the impact of the cost-of-living crisis on a company's workforce, suppliers and customers.
‘The UK has signaled its support for the ISSB’s standards, which are expected to be finalized this year,’ Hayter says. ‘Listed companies are likely to be caught out by this development from next year.’
Mid-cap companies lose with Mifid IIIn Europe, the changes initiated by the Mifid II regulation on brokerage activities have had major impacts on the way companies access market intelligence. Mid-cap companies have been particularly affected by the reduction of equity coverage from brokers. Experts are calling for a review of these rules.
‘On a day-to-day basis, we see many issuers experiencing difficulties in obtaining quality feedback from investors,’ says Guillaume Moinet, co-CEO and founder of Scalens. ‘Yet this is an essential requirement to understand their expectations and investment criteria.’
We see many issuers experiencing difficulties in obtaining quality feedback from investors
Moinet says it’s very difficult for companies to craft appropriate rhetoric for the equities market if the executive team does not know precisely what investors want. ‘In such an environment, it is not surprising to see activist campaigns increase over the last 10 years,’ he points out. ‘Companies can still rely on third parties for market intelligence or perception analysis but this means a loss of independence and control and often a significant cost.
‘At a time when governance concerns have taken on a new dimension, it is surprising that there is still so much to be done to make the dialogue between issuers and investors truly transparent and mutually beneficial.’
These rules have not been updated for more than 47 years
US prioritizes timely informationNIRI chief executive Matt Brusch notes the institute’s top advocacy priority for many years has been improving shareholder transparency.
‘In the US, institutional shareholders are generally only required to disclose their long positions quarterly in an SEC form 13F filing,’ he says. ‘The filing deadline is 45 days after quarter end. If you play that out, with quarterly reporting and a 45-day disclosure window, an institutional investor can, for example, acquire a 4.9 percent position in a public company in early January but not disclose that position for as many as four months, which would be May.’
For many US public companies, a majority of their shares may change hands during this 135-day period, which includes the end of the last calendar quarter and the 45-day reporting window.
‘So a significant portion of the ownership information in these 13F filings can be out of date by the time the investment managers make their quarterly filings,’ Brusch notes.
Unlike companies in the UK and other international markets, US firms do not have access to a share registry that lists all their investors. For this reason, US-listed companies rely on the data contained in these institutional 13F filings to learn which investment managers own their shares and the size of their positions.
‘These rules have not been updated for more than 47 years and haven’t kept pace with technological change and other advances in the capital markets,’ Brusch says.
NIRI has advocated for improvement in this area for years. To this end, it supported a bill sponsored by the House Financial Services Committee chair in 2021 to authorize the SEC to shorten the reporting period for 13F disclosures. That bill never made it to the House floor for a vote.
Now the new Congress is seated, this year NIRI intends to work to reintroduce this legislation for the benefit of all public companies.
Short-selling and real-time data Elsewhere in North America, the Canadian Securities Administrators (CSA) is working its way through two capital markets initiatives. The first is a joint venture between the CSA and the New Self-Regulatory Organization of Canada, a recent entity that combines the Mutual Fund Dealers Association of Canada and Investment Industry Regulatory Organization of Canada, on improving rules around short-selling.
The short-selling regulatory review follows the release of a 2020 discussion paper that addressed issues such as the risk of traders not closing out a short position if the price of the relevant underlying security rises. The review also examined whether mandatory close-out or buy-in requirements, in the same vein as existing rules in the US and the EU, may benefit Canada’s capital markets. This would see unsettled trades compulsorily settled if the seller fails to close the transaction.
The CSA is also looking into whether better transparency and stricter market oversight rules for short-selling may improve transparency in Canada’s capital markets.
The CSA’s second major capital markets initiative concerns access to real-time market data. This project is extremely technical and explores topics such as access to market data in an environment in which trading is fragmented across different venues.
This is also an issue under investigation in the US and Europe, on the back of a consultation process initiated by the International Organization of Securities Commissions to understand the market data environment in different nations.
In Canada, the review centers on the cost to access real-time market data, including the impact of fees and charges on returns. Other elements of the consultation process include a review of the global equities’ ecosystem and regulatory environment, as well as factors such as the impact of any changes to regulation on liquidity and price discovery.
The consultation process will further consider any potential unintended consequences that would result from changing Canada’s market regulation. Consultation on these issues will take place over the course of the year.
Transparency in AsiaNew rules introduced by the Stock Exchange of Hong Kong, which came into force in January, require its listed companies to have an annually reviewed shareholder communication policy.
Another new listing rule requires independent directors to be replaced after nine years or no longer be counted as an independent director. Additionally, the Hong Kong exchange is introducing new rules that require its listed companies to release an ESG report at the same time they release their annual report.
Companies can still rely on third parties for market intelligence or perception analysis but this means a loss of independence
‘In the past, listed companies have been permitted to release their ESG report later than the annual report,’ explains Eva Chan, head of the Hong Kong Investor Relations Association.
Enforcement in AustralasiaThe laws in Australia on stock trading and transparency in markets have been settled for some time and the sense is that they are fit for purpose and don’t need material reform.
Market regulators, including the Australian Securities and Investments Commission (ASIC), are therefore concentrating on enforcement rather than significant law reform.
‘That said, greenwashing and climate-related disclosure are primary focus areas for ASIC, which has recently taken action against market participants in relation to greenwashing and expects to do more in the future,’ says Antony Rumboll, law firm Baker McKenzie’s Australian head of equity capital markets.
With regards to disclosure, Australia is part of the global push for standardized climate-related disclosures. New Zealand has already passed legislation making climate-related disclosures mandatory for some large financial market participants, so it will be interesting to see how Australia moves on this issue. The disclosures mandated by the TCFD are likely to be implemented in Australia.
Regulation aside, Rumboll says that following Covid’s lockdowns, most listed companies are moving back to physical shareholder meetings because there is a sense that the virtual meetings held in the pandemic years did not allow for proper debate.
‘The Australian regime that allows shareholders to vote on a company’s remuneration of key management members and directors has proven a strong tool,’ he points out. ‘It requires extensive disclosure of executives’ remuneration and the relationship between reward, financial performance and corporate governance.’
The Australian capital markets laws generally operate efficiently and effectively, providing investors with the protections and information they need, while not presenting listed entities with overly burdensome red tape.
The introduction of standardized and mandatory climate-related disclosures should incrementally improve what is already a strong and mature market.
So while there are no real fundamental shifts happening across global markets regulation, there are many incremental changes taking place that should improve the way capital markets operate over time.
