Rients Abma (Eumedion): ‘The European Capital Markets Union Needs to Urgently Get Off the Ground’
The interview by Gijs Linse of A&O Shearman with Eumedion director Rients Abma takes place at the De Rode Olifant in The Hague, originally built in 1924 for The American Petroleum Company (Esso since 1947). Driving into The Hague from the A12 motorway the imposing brick colossus looms imposingly at the end of Utrechtse Baan. The nickname refers to the reddish-brown color of the 3.5 million bricks used for the building as well as to the sculpture of an elephant's head in the tower. The client commissioned the tower to make the building stand out above the headquarters of competitor Shell on the nearby Carel van Bylandtlaan. Since 2012, the hip office rental company Spaces has occupied the beautiful art deco building, and Eumedion was one of its first permanent tenants in 2013. In the main hall, Abma points to the murals of sturdy workers at a refinery. ‘It shows how important workers were to a company at the time.’
The conversation flows naturally to the evolving ideas about entrepreneurship. The postwar, social Rhineland model - which states that the enterprise is an entity shared by management, employees and capital - was increasingly eroded between 1980 and 2010 under the influence of liberalism and replaced by the model of American economist Friedman in which everything revolves around profit maximization. 'Officially we still had a stakeholder model, but in practice the interest of the shareholder prevailed.'
Since the financial crisis, the pendulum has been swinging the other way again. 'Through the bailout of the banks, the government's grip on the financial sector has tightened significantly. Similarly, during the corona pandemic and the energy crisis, the government had to step in again to keep at least part of the business sector afloat. It made it clear that the market cannot solve everything. And as industry becomes more dependent on the government, the government can in turn expect companies to be more concerned about their social responsibility.’
Society has been introduced as a fourth stakeholder, and companies are increasingly having social goals imposed on them through laws and regulations. Eumedion represents the interests of institutional investors in the field of corporate governance and sustainability. Do you see this development as a 'must' - because the long-term survival of a company depends on participating in the transition, or do you indeed feel an own responsibility?
‘Pension funds and the asset managers who work for them are in fact social institutions themselves as they need to provide income security for pensioners. It is therefore quite reasonable to expect them, also as investors, to feel co-responsible for helping to solve major societal problems. Especially in the Netherlands, moreover, studies indicate that an increasing number of pension fund participants want those funds to invest in ‘good’ companies and exclude ‘bad’ ones. Partly for this reason ABP has, for example, decided to exit oil, gas and coal companies. So there really is a push factor from clients and participants to encourage more sustainable business.
At the same time, there is friction because U.S. investors, who own a large portion of Dutch stocks, are less committed to these goals or are even moving in the opposite direction. This is happening partly because of the influence of anti-ESG bills in numerous U.S. states. For example, large U.S. asset managers are giving less and less support to shareholder resolutions to make companies more sustainable. You also see the investor-led Climate Action 100+ crumbling, as big players like State Street and J.P. Morgan Asset Management have dropped out for fear of political repercussions. Political sentiment around this issue is also changing in Europe. The CSRD was only narrowly passed in the European Parliament, whereas three years ago it was barely debated. The final negotiations on CSDDD were also extremely difficult. In this respect, we are now really at a crossroads.’
The declining interest in ESG investments in the United States could well reach us too. Do you see your constituencies reacting to the changing sentiment?
‘Continental European pension funds and insurers fully endorse the trend toward greater sustainability and social responsibility of large companies and of themselves. A number of Dutch pension funds are therefore considering more focused and concentrated investing, in order to further strengthen the stewardship role. Do you really need 6,000 different companies in your equity portfolio to avoid concentration risks or can you also diversify sufficiently with, say, 1,500? If you genuinely know which companies you are investing in and build a long-term relationship with those companies, you offer those companies opportunities to adapt their business model and may well, as an investor, have more impact than you do now.
Eumedion is publishing a paper on this topic at the end of October. Our annual symposium in November is also devoted to the theme.’
Is the choice of pension funds not heavily dependent on how the economy is doing? When a pension administrator can index, there is more room to push for sustainability than if that is not the case and pensions are at risk of falling.
‘That including sustainability in investing comes at the expense of returns is a persistent assumption among some parties. You can also reverse it and reason that by not doing it you miss out on future share price gains and dividends. Nevertheless, as the board of a public company, you will have to demonstrate to your shareholders that your sustainable earnings model is producing results in the short and medium term, even if these may temporarily be lower.
A clear growth strategy, in which a large part of the profits is invested for long-term growth, can be communicated to stakeholders readily. There are many investors who believe in growth stocks precisely because of the expected results of new business models in the long term. But it is key to effectively communicate this to the market and to create realistic expectations.’
At the same time, there are companies that deliberately create ‘old-fashioned’ products because of customer demand. Why continue to invest in companies whose stranded assets are a ticking time bomb?
‘There are a number of pension funds that want to be catalysts for sustainability. An investment in the fossil industry no longer fits with that. Other investors note that we are still dependent on the fossil industry in the short and medium term and want to support that, because they still have faith in the long-term strategy of those companies. The two may very well go hand in hand, institutional investors all have their own investment philosophies and must consider the preferences of their clients and participants. Returns will in part depend on the speed of the energy transition which is determined by society itself. The drive to achieve the Paris climate goals is becoming increasingly tangible through legislation and regulations worldwide. At the same time, things could be very different if, say, five years from now, it turns out that the targets which were set are unachievable. Then the old fossil earning model may in fact last longer than we now anticipate. How quickly the energy transition unfolds will therefore depend on social developments.’
And vice versa: how risky is it to invest in companies that do stick their necks out and want to change and accelerate? If companies are too far ahead, they may not be serving their customers adequately and they might change over to a competitor.
‘As a professional party that needs to make a financial return, you naturally look at the risks. For example, the new energy industry has many companies with very volatile returns. Nevertheless, if you are convinced of the potential, there are other ways to maintain a level of control over your investment. Take Fastned, which is building and operating a fast-charging network along Europe's main road network. As a listed company, they chose to remain a limited liability company and to go public with non-voting certificates. Basically, as a certificate holder, you have no say there. Nevertheless, a large institutional investor took a 10 percent stake in one of the latest investment rounds. To defend that move to their investors, they made it a condition to have their own supervisory director on the board.
As a matter of fact, you see this more and more: taking a larger equity stake where more direct supervision of the board and policies is then arranged. For example, Aegon, with a 30 percent stake in a.s.r., has two supervisory directors on the a.s.r. board. This results in more of a stewardship model. This model is not so much based on the principal-agent model of distrust between shareholders and the board. After all, with such a larger equity stake, you are to a certain measure in the same boat and will collectively arrive at a common goal.’
How can companies protect themselves against too much shareholder influence?
‘Companies that are serious about embedding sustainability and social responsibility in their strategy are better facilitated by the CSRD and CSDDD legislation. Dutch company law also offers room to be creative in this regard. A B-Corp certification allows you to anchor the social purpose in the articles of association. Shareholders are then also bound to this social purpose.
If, like Fastned, you opt for steward-ownership, financial ownership is separated from voting rights. Such a complexity in shareholder structure with less control for the capital provider can lead to some pressure on valuation, but this can be offset by more direct forms of oversight through the supervisory board.’
Are differences between European and U.S. laws going to slow the growth of European businesses and economy because there is no level playing field?
'We as EU have very progressive laws and regulations on sustainability, at least if you compare them internationally, which demands a lot from business. If we get too out of sync with other blocks in the world, there could be pressure on the competitiveness of European business. There already is fierce competition regarding the location of headquarters, the location of registered offices and the location of stock exchange listings. This is also related to legislation. We have had some de-listings here partly because of the CSRD and the CSDDD. Whether it will diverge further also depends on what shareholders do. To what extent do they value that companies do fair and decent business with an eye for the environment and human rights and account for it properly? European pension funds and insurers will play a crucial role here. Will this be an important criterion in the selection of asset managers? Will this be an important issue in investment policies, voting policies and dialogues with companies? We are really at a crossroads now in this respect.’
What needs to happen today to ensure a more level playing field in five- or ten-years’ time?
‘The risk appetite among investors in the United States is much greater than in the EU, as is the depth and width of the capital market there. As a result, liquidity there is also higher which attracts many companies. Europe cannot yet offer that, partly because the whole project of a capital markets union is just not taking off. But Europe itself can do something about that. A precondition is that we grow towards a much broader and deeper capital market. That will only succeed with consolidation of exchanges and harmonization of rules. If each country insists on its own little stock exchange and, moreover, is always fighting among themselves - even within the Euronext context - we are not providing a good basis for the next generation of tech and biotech companies. I do worry about that.
So it is crucial that the next European Commission really starts to make progress in this area. If we as Europe do not strengthen our competitiveness in the capital market, it will also be difficult to enforce that desired extraterritorial effect of CSRD and CSDD. With the privacy legislation, the GDPR, we still succeeded, but I expect that we will experience incredible pressure to delay or adapt the application of these new directives for, by example, large U.S. companies operating in Europe. To be able to enforce some of these measures on American companies operating here, the European Union needs to be very strong. But the importance of the European economy is in fact declining internationally.'
Will the outcome of the election in the United States have any impact on the ESG direction in the United States?
‘Partly, yes. If Trump wins, the US stock market regulator SEC will change color. But even now, with Democrats in the majority on the board, it has still not succeeded in making climate reporting mandatory, for example. Of course, that will be completely different if Republicans dominate the board. No doubt then the regime regarding the admissibility of shareholder resolutions on sustainability will also be tightened. But that is all at the central level, while the 50 states themselves also have far-reaching powers. On this level it will not really matter who wins the election. Blue states will continue to demand companies and investors invest more in ESG goals. Red states, on the other hand, will continue to resist and sue companies and investors because of those same ESG goals. Unfortunately, it seems that the complexity and polarization are here to stay.’
This article was published in Management Scope 08 2024.
This article was last changed on 24-09-2024