Sustainability among new focus in revised OECD corporate governance principles

The G20/OECD Principles of Corporate Governance are the main international benchmark guiding global policymakers and regulators on developing effective legal, regulatory, and institutional frameworks for corporate governance. These principles have now undergone a major reform to reflect recent trends in capital markets and corporate governance policies and practices.

The inclusion of a new sustainability chapter is one of the key features of the updated principles. It is the first time the principles have incorporated recommendations on sustainability and resilience to help companies manage climate-related and other sustainability risks and opportunities. The recommendations include developing better guidance for company directors and boards, encouraging sustainability targets to be disclosed alongside metrics that can track progress, and connecting the disclosure of sustainability matters with broader financial reporting and other corporate information.

The new guidance on sustainability places consistent and reliable sustainability-related disclosure as central to the efficacy and resilience of capital markets, which rely on investors being able to compare companies’ past performance and future prospects by taking into account the varied elements of environmental risks and opportunities.

However, the principles take a cautious approach to mandatory reporting. Instead, it is suggested that disclosure frameworks need to be flexible, and requirements may need to be phased in incrementally.

The focus on sustainability is also reflected in the accompanying OECD Corporate Governance Factbook, which is updated every two years and tracks how the principles are being implemented. Prepared in parallel to the 2023 revision of the principles, the latest edition includes new sections on sustainability and other key developments.

Corporate law expert Neil Keenan of Pinsent Masons said: “Both publications highlight the role of the corporate sector in advancing the green transition, the materiality of climate change as a financial risk, and the changing regulatory landscape in this area.”

According to the Factbook, all of the 49 surveyed jurisdictions have taken steps to promote sustainability-related disclosure. However, only half have explicit provisions on board responsibility for sustainability policies and only a few jurisdictions, mostly within the EU, have adopted regulatory frameworks on ESG rating.

The document highlights that the number of listed companies disclosing sustainability-related information is increasing but overall remains low, around 19% of listed companies globally, ranging from 17% in China to 34% in Europe.

Apart from sustainability, the revisions in both the principles and the Factbook reflect several other developments in the corporate governance world, such as a renewed emphasis on shareholder rights and trends in corporate ownership and financing.

As the Factbook shows, a major trend in the world of corporate ownership is the increase in the share of investment held by institutional investors such as mutual funds, insurance companies and hedge funds. These institutional investors held 44% of global market capitalisation at the end of 2022, but corporate governance requirements vary across jurisdictions and for different types of investors. For example, all but six of the 49 surveyed jurisdictions either require or recommend some institutional investors to disclose voting records.

The principles respond to these changes by setting out recommendations aimed at both institutional investors and related advisory services like proxy advisors and index providers. While stopping short of recommending mandatory engagement with corporate governance across the board, the principles encourage actors to disclose governance policies and engage with shareholders through stewardship codes using a “comply or explain” approach.

The revised principles also provide comprehensive guidance on shareholder rights, focusing on the importance of effective enforcement mechanisms that balance investor remedies and the risks of excessive litigation. The guidance recommends that virtual or hybrid meetings should be permitted to encourage and reduce the costs of shareholder engagement, but notes that remote meetings need to be well handled to ensure that they do not discourage questions, and issues such as digital security and authentication need to be considered.

The principles also recognise a general increase in corporate debt and bond financing, and introduce further recommendations on bondholder rights and debt contracts. In particular, the principles recommend that the exercise of the rights of bondholders of publicly traded companies be facilitated in various ways. Corporate governance frameworks should incentivise investors to be more active as creditors, for example, through clearly defined covenants, and facilitate bondholder participation in out-of-court debt restructurings.

“Well-designed corporate governance frameworks contribute to broader economic objectives by facilitating access to financing, protecting investors and other stakeholders, and promoting the sustainability and resilience of companies,” said Keenan.

“The new principles respond to key developments in capital markets over the past year. They emphasise flexibility, recognising that frameworks should adapt to diverse contexts while promoting common objectives. Companies should be aware that the principles are widely used by international organisations and national governments around the world. Although non-binding in itself, the new guidance will feed directly into legal requirements and policy across individual jurisdictions,” he added.

The OECD principles of corporate governance are endorsed by all member countries of the OECD and the G20 and Financial Stability Board.