Asset managers are being caught in the middle of a game of ESG tennis as investors and lawmakers on both sides of the Atlantic seek to take control of proxy voting power.
In the UK, the government-established Taskforce on Pension Scheme Voting Implementation took aim at managers in a scathing report which blasted managers for “attitudes of incumbency and complacency so worrying as to require comment” for their stances on allowing split voting in pooled funds, and suggested legislation as “the nuclear option” if the industry did not move to facilitate it.
The report said that good voting as part of a broader stewardship programme can help secure better returns for pension fund members and that it was “probably naïve” for industry participants to think that the views of asset owners and savers “can be ignored”. It highlighted a Majority Action report on the largest passive managers failing to support resolutions filed by Climate Action 100+ members.
Meanwhile in the US, managers are facing an attempt by Republicans in the Senate to strip them of voting power at companies where they hold more than 1 percent of shares. The INDEX Act, currently making its way through Senate committees, would prevent managers from exercising proxy votes on nonroutine matters at companies where they hold 1 percent or more of shares, unless acting on client instructions.
While many of the co-sponsors of the legislation couch their comments on the matter in terms of “democratising investing” and “diminishing the consolidation of corporate voting power”, Tennessee senator Bill Hagerty said that Americans’ retirement funds “have been weaponised by investment advisers to advance political agendas that are antithetical to many investors’ views and financial interests”.
Ben Colton, global head of asset stewardship at State Street, said the manager’s approach was not “woke” – emphasising that its choices were about value, not values. “It’s always been about financial materiality,” he said. “One thing all of our clients have in common is that they are all seeking long-term sustainable returns so our voting guidelines are always going to be focused on maximising value.”
With regard to the INDEX Act, Colton said he was concerned that companies might not be able to reach a quorum on votes if a large percentage of shareholders do not participate. He also warned that the act would have the “unintended consequence” of amplifying the voting power and voice of hedge fund managers, advisers and smaller investors.
Managers also have concerns over split voting efforts on the other side of the Atlantic. Rebeca Coriat, head of stewardship at Lombard Odier Investment Management, said that split voting would dilute the firm’s engagement power.
If you allow it, she said, “you will have voted for and against on the same resolution. So when you come and engage with the company, who are you representing? The client that voted for or the client that voted against?”
She added: “Where I see more value and things will move along more is, rather than giving that full instruction capacity to the underlying client, having some sort of advisory hub where my client can let me know how they would like to vote. I will take that into account before I instruct the final vote. I think that fosters engagement between the asset owner and myself and still allows us to centralise voting.”
LOIM consults with clients on their voting guidelines and seeks to address any gaps in voting policy before a company AGM via one-to-one meetings.
Victoria Barron, head of sustainable investments at the BT Pension Scheme, said that due to recent regulatory changes, the £57.5 billion ($69 billion; €67 billion) fund has started requesting more data from its managers and scrutinising them more heavily on their voting activities. While most of BTPS’s funds are in segregated mandates where split voting is not an issue, Barron also raised concerns about the quality of resolutions being put to the vote.
Barron, who has written resolutions – and “cannot emphasise enough how long and how painful they are” – said it was very difficult to craft a resolution that is well-written, is trying to improve things for the shareholder, and does not seek to micromanage a company.
Some resolutions, she said, were beginning to veer into the latter territory. “I do think there need to be better conversations around voting,” she added. This is reminiscent of concerns raised by both BlackRock and State Street that some resolutions going to the vote are too prescriptive.
However, BTPS did sign a letter from the Occupational Pensions Stewardship Council to asset managers calling on them to pay more attention to the voting priorities of pension funds.
“Smaller asset owners should have the right to vote the way they want to vote,” said Barron. “It is their share, their money and I think that the asset management industry could make it easier for clients to do that.”
Peter Uhlenbruch, director of financial sector standards at ShareAction, said that while the group was encouraged to see UK asset owners setting stronger expectations for their managers, particularly on voting, it was worrying see US asset owners challenge the idea of prioritising ESG in their manager relationships.
He stressed the importance of progressive asset owners “[voicing] their expectations collectively, to show that in spite of some critics, the call for more environmentally and socially responsible investment across the globe isn’t going away”.