The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) have jointly published a report on the implementation of SRD II on proxy advisors and the investment chain. Two proposals in the report could potentially have repercussions for players in the post-trade space: the introduction of a harmonised definition of “shareholder” and transparency requirements for proxy advisors. Virginie O’Shea, CEO and founder of Firebrand Research discusses the changes.

Communication is key

The rules on shareholder identification introduced by SRD II were a part of the efforts to encourage shareholder engagement and facilitate the exercise of shareholder rights. But who is a shareholder? There is currently a lack of a common definition of shareholder, and a lack of harmonised requirements for communication between players across the investment chain, including issuers, CSDs, and intermediaries. The report finds that this has led to obstacles in the processing of shareholder identification requests in a timely and consistent manner across the EU. The intention to create a harmonised definition of shareholder, therefore, has been a long time coming, as indicated by many of the 73 respondents to the study.

Moving forward, the report suggests introducing a “golden operational record” – an electronic, machine-readable, and fully harmonised document that issuers will be obligated to send to CSDs to initiate the shareholder identification process. Respondents recommended mandating a standard format, such as ISO20022 for flows of information.


The pressure is on

Such a development will likely add to the already long to-do list for an industry currently caught in the throes of a digital transformation. “At the moment, ‘machine readable format’ can mean using email,” Virginie O’Shea points out. “So people are getting away with murder, essentially.”

Things will certainly change if a new mandate comes into force. “Custodians will have to make sure that they are able to use ISO20022 messages,” says Virginie O’Shea. “But many markets have not really adopted it in this space, and there hasn’t been enough pressure on firms to adopt it. Custodians who haven’t adopted it are going to face pressure to change their technology – and put pressure on their clients to change their technology.”

“There’s going to be more pressure on everyone in the post-trade space to adopt more technology, more standardised processes, and move away from manual processes.”

Look who’s talking

In a discussion on shareholder rights, the role of proxy advisors has to be mentioned. The report points out that two major international proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis, have a combined global market share of more than 90 percent, giving them the potential to “exercise considerable influence on corporate decision-making across the globe”.

In light of this, the report suggests requiring proxy advisors to provide more detailed disclosures on conflicts of interests, including the types of revenue they are generating by providing services to different types of clients, and the relative weights of those revenues. A basic registration mechanism at EU level, which would require proxy advisors to notify their activities on EU listed companies, is also a part of the proposal.

A piece of the pie

While new transparency rules may be seen as a word of caution for proxy advisors, Virginie O’Shea thinks that it may shake up the industry in unexpected ways. “Proxy advisory has never been a business that generates a lot of revenue. But that was before ESG became big. Now that proxy advisory tied to something a little more revenue generating, it could possibly become more interesting for people to enter the space.”

“There’s a lot of pressure to move away from having just two (major proxy advisors); there’s a lot of people in the ESG data space that are very interested in this area.” Pointing out that Deutsche Börse acquired an 81 percent stake in ISS in 2021, she continues, “CSDs and other big players in the market infrastructure space may be interested in setting up more services around advisory.”

Cross-border shared interest

The EU isn’t the only jurisdiction where proxy advisors are gaining attention. In the US, the House Financial Services Committee recently held a hearing during which the influence of proxy advisors on shareholder decisions in ESG investing was questioned.

“It’s interesting to see the proxy advisors getting so much attention on both sides of the Atlantic,” says Virginie O’Shea. “EU ESG proponents and US anti-ESG proponents are on the same page for once.”

“It’s indicative of the increasing importance of governance – holding companies to account, making sure that things are run in the right way. Everyone naturally thinks about the ‘E’ (environmental) and the ‘S’ (social) in ESG. The ‘G’ (corporate governance) part often gets forgotten, but that’s how you hold companies to account. The ‘E’ and the ‘S’ don’t mean much without the ‘G’.”