Why corporate actions are a key part of the G in ESG

Poor handling of corporate actions information can be an indicator of poor governance at a firm level, but with so many initiatives out there to fix persisting data issues, it’s time to take a closer look at corporate actions through the lens of the G in ESG.

Certain bits of the asset servicing space are getting a boost from the industry’s ongoing focus on environmental, social and governance (ESG) investment strategies, but up until now, very few people have connected the dots to corporate actions.

Incorrectly processing corporate actions data, missing deadlines or misinterpreting information can be a costly endeavour. Just look at Robinhood’s experience last year where it mishandled a reverse stock split for a healthcare company listed on Nasdaq in December, which ended up costing Robinhood $57 million in one day. Robinhood’s loss was the difference between it beating and missing fourth-quarter earnings expectations. It also meant that the firm cancelled the executive team’s bonus for 2022. Ouch.

Poor handling of corporate actions information can be an indicator of poor governance at a firm level; hence even the processing of this data by intermediaries should be under scrutiny. If a bank or broker makes an error, their own ESG scores could be impacted (with an emphasis on the G component here).

Of course, corporate actions data isn’t always the easiest information to attain or parse, depending on the market. Some corporate actions teams have joked that in some markets, event updates are nailed to a tree. Though there aren’t many tree deliveries, there are plenty of sources of corporate event information that need to be monitored and checked by the multitude of people that are employed, often seasonally, to deal with this process. Corporate actions remains a heavily manual area, where specialist knowledge is often required. Do you know what a Dutch auction is? No? You mustn’t work in asset servicing then.

However, very few regulators seem to pay much attention to corporate actions market practices, with proxy voting garnering the most attention in Europe and the US. The focus of the European Commission and the Securities and Exchange Commission (SEC) is firmly on shareholder transparency and engagement; hence, logically, corporate actions practices should be in the same bucket as proxy voting.

Corporate events can tell you a lot about a company’s health – even the timing of announcements. A delay might signal financial trouble or another impending significant action like a merger in the cards. Enabling shareholders to make selections on their event options in good time and with the correct level of information also firmly sits in the G in ESG camp. The link hasn’t yet been made in regulation but with the revised Shareholder Rights Directive (SRD II) under review at the EU level, we may see some moves in that direction in the future. That’s provided that the regulators understand the bigger picture here.

Of course, SRD II has its own problems. Patchy implementation and, ultimately, a lack of enforcement ‘teeth’ has meant many of its requirements haven’t quite made it into practice. So, the EU regulators have a job ahead of them. But if the focus in Europe at a more strategic level is on engaging investors, especially retail investors, and fostering greater corporate accountability, then corporate actions should play a role here. The Capital Markets Union is a lofty ambition for the region and its pillars are varied and extremely wide-ranging, but if it is to be taken at all seriously from an investor perspective, things need to change.

Also, why on earth in this day and age can simple processing errors continue to cost so much money year-in year-out? There’s got to be a better way to handle this issuer to investor data chain! There are numerous initiatives in this area at the moment – get out there and support them!