Responsible Investor

How to solve the paradox of active ownership

Successful equity managers tend to be poor active owners, while active owners tend not to win equity mandates. Could unbundling the activities be the solution?

Pension funds are increasingly accepting the need for active ownership on environmental, social and governance issues, but few seem to have developed an effective approach to implementation. It is becoming clear that a number of environmental, social and governance (ESG) issues are both ethically and financially significant for pension funds. For example, it is in neither in the interests of society or in the financial interests of pension scheme beneficiaries that climate change is left to go unchecked, and yet pension fund capital is today being used to build a new generation of coal fired power stations around the world, accelerating carbon emissions. Perhaps the clearest sign of pension fund acceptance of this agenda is the fact that many of the world’s biggest pension funds have in the last year or so signed up to the UN Principles of Responsible Investment.
But how should pension funds go about implementing active ownership? The most popular approach, at least for UK schemes, is to delegate implementation to the

asset managers employed by the scheme to manage equities. For most pension funds, this strategy does not seem to be working very well – at least according to a survey I recently conducted for Hymans Robertson of the 50 largest pension fund asset managers operating in the UK market. See Downloads
The survey finds that only a handful of asset mangers that have substantial programmes to implement active ownership. The best devote substantial resources to this area. Some employ as many as 15-20 specialist staff, contact hundreds of companies a year and are able to point to significant results in terms of changes to corporate behaviour.
On the other hand, the survey shows that the vast majority of equity managers take a much more limited approach to active ownership. For most that responded, active ownership work on ESG issues involves little more than employing a voting agency to ensure the shares get voted consistently with client policies. While this is certainly a start, it falls well short of the kind of carefully

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