This article was first published in Eurofi's Views, a bi-annual magazine comprised of contributions from a wide range of public and private sector representatives on recent regulatory developments and the main macroeconomic and industry trends impacting the EU financial sector.
The European Commission’s Capital Markets Union initiative continues to be a key policy priority for the creation of sustainable and inclusive growth across Europe. Multiple efforts both locally and at an EU level are needed to create long-term opportunities for both small and large companies and investors. This has become even more urgent in light of the immediate need for recovery from the economic effects of the pandemic.
Companies that opt for equity funding on the public markets create more jobs than companies that stay private, and it also allows a broader investor community to share the growth journey. This is why I am convinced of the societal benefits of equity funding.
In the Nordic and Baltic markets where Nasdaq operates both regulated markets and growth markets (Nasdaq First North), we see record number of companies leveraging the equity markets for financing. Multiple factors contribute to this, but one reason is that local policies since many years have promoted and achieved a relatively well-developed equity culture among private investors. As a result, there is now a financial ecosystem with many types of actors supporting companies on their journey through the funding escalator.
I strongly welcome the European Commission’s initiative on rebalancing the current bias towards debt financing by alleviating the burdens on equity finance. This initiative should be at the core of CMU. Equity is more heavily taxed than debt in many countries. Interest payments on debt may be deducted from profits before they are taxed, whereas equity financing does not receive any form of tax relief. On top of that, equity is subject to significant taxation both in terms of capital gains and dividend payments. Hence, this structural bias towards debt financing incentivises companies to take on debt rather than equity. Tax policies should not discriminate between debt and equity.
While taxation is the competence of individual EU member states, any efforts by the European Commission in terms of coordination, sharing best – and worst – practices and finding common solutions have great potential to lead to positive outcomes for European companies and investors and the growth of stable economies as a whole.
Measures taken will gather more support and confidence by the business community if long-term foreseeability is guaranteed. As an operator of public markets, Nasdaq believes that long-term investments by engaged shareholders are crucial for supporting growth. Stable tax policies play an important part.
Another factor is simplicity. One example of successful simplicity is the various versions of ‘investment savings accounts’ which have been introduced in different countries in recent years. For instance, in Sweden the tax reporting related to such investment saving accounts is automatic and relieves the investor of significant administration. It has attracted a lot of private investors, which plays an important role especially for the success of our growth market Nasdaq First North. Among several factors, I believe this simplicity has been one of the more important ones behind the success of these types of accounts.
Further measures to increase retail investor participation should also be prioritized, including considering if investor protection provisions in MiFID can be adapted to non-professional but still experienced investors.
Additionally, ensuring that the MiFID framework delivers a market structure that serves both larger and smaller investors fairly and efficiently, and provide equal growth opportunities for small and large companies alike, is key. For this, transparency and a robust price formation process is fundamental.
To support and ensure a good financing mix, I finally want to highlight the role of the corporate bond markets. Corporate bonds can often be a very appropriate financial instrument for a company as well as an investor. However, there is room to realize the potential of corporate bonds for smaller companies and smaller investors. The regulatory framework currently incentivizes market participants to use the wholesale markets and instruments with relatively high denominations. For smaller companies, as well as smaller investors, instruments with lower denominations can often be more suitable. Seeing how the green bond market, which Nasdaq launched in the Nordics a few years ago, has grown exponentially, this also illustrates the importance and usefulness of green corporate bonds for the transition to a more sustainable society.
Equal opportunities for investors, companies and also financing should be a fundamental part of the Capital Markets Union, and Nasdaq supports any action that enables a more dynamic financial landscape where companies of all sizes are able to choose from a mix of different sources of capital, where investors are able to enjoy growth opportunities, regardless of if they want to invest €10 or €10 billion and where sources of funding are treated the same way no matter if they are debt- or equity based.