Manager inconsistency on stewardship drives growing frustration among UK asset owners

It came as no surprise that oil and gas AGMs this year were contentious – but dissatisfaction did not just come from climate protesters. Voting results point to a growing rift between asset owners and their managers on the future of fossil fuel giants, and major UK asset owners are doubling down on efforts to address this.

Concerns around manager actions on stewardship are not new. Scottish Widows warned managers in July last year that it would end relationships if they had not signed up to the UK stewardship code by 2024, while Cardano “eliminated” several managers in 2021 due to poor performance on stewardship. But it is clear that the issue is climbing up the agenda in the aftermath of the latest proxy season.

This produced some key examples of the expanding gap between pension funds and their managers.

The most high-profile was Shell’s mid-May AGM, where some of the UK’s largest funds – including NEST, USS and London CIV – voted against the chair, and CofE Pensions Board opposed every director. However, chair Andrew Mackenzie still received 93 percent support.

Already a week before the Shell vote, the UK Asset Owner Roundtable, which represents the country’s largest asset owners, had announced plans to summon asset managers to a meeting to discuss concerns over a misalignment on how they are voting at European oil and gas majors this year.

The group has also commissioned academic Andreas Hoepner to examine voting patterns at key AGMs.

A combination of regulatory drivers – such as TCFD disclosure requirements and pressure to sign up to the UK Stewardship Code – and targeted campaigns from groups such as Make My Money Matter is also driving the increased push on asset managers, believes Will Martindale, co-head of sustainability at Cardano.

“There has been a little bit more focus in recent months on the portfolio compositions, the actual companies that the asset manager is investing in, and then how the stewardship rights are being used alongside those investment decisions,” he says.

A number of asset owners are now looking to tackle the issue of misalignment with their managers and analyse the extent of the issue. Some are already planning to escalate these efforts with the worst offenders, or take voting in house.

‘Jarring’ discrepancies

A stewardship figure at one large UK asset owner told Responsible Investor that the organisation had carried out analysis of its passive mandates last year and found it “nullified or defeated” itself in 65 percent of votes in North America and around half in the UK by voting in opposite directions through holdings at different managers.

The asset owner developed its own voting policy this year in anticipation of taking some voting activity in-house. Preliminary results showed that in 80 percent of cases at least one of the four main managers analysed was misaligned.

Analysis by Scottish Widows produced similar results. The £166 billion insurer and savings provider took some voting in-house in 2022 and developed its own voting policy. According to Maria Nazarova-Doyle, head of responsible investments and stewardship, the investor found that for key votes there was not enough time to consult with managers over their position. Scottish Widows therefore directed votes on contests it felt particularly strongly on.

In the aftermath of this year’s proxy season, she says it is “really quite jarring” to see how often discrepancies arise between how Scottish Widows voted and how its managers voted with their wider assets.

The firm also ran an exercise to understand how its voting policy would have applied last year. Again, there was “really quite a big difference” between asset managers and alignment with the policy, Nazarova-Doyle says.

There is also inconsistency between asset manager approaches. While firms may agree on the need for a company to transition, they take very different stances on shareholder resolutions and the correct path for this to happen, says Hilkka Komulainen, head of responsible investment at Aegon UK.

Some indicate support for a climate-related resolution in order to incentivise a company to transition. Others might vote against, arguing that progress should be led by the board and not shareholders, so the escalation pathway involves voting against directors.

For Martindale, there can be a “misalignment of incentives” which is important to consider when looking at the stance taken by managers and owners.

“This is best summed up by the living wage campaign at Sainsbury’s,” he says. “If Sainsbury’s is paying more in wages then that presumably would affect the profitability of the company, but the asset owner will be comfortable with that because it’s addressing long-term systemic risks such as inequality.”

Definitions and data

When looking to assess managers on their stewardship activities, two major challenges flagged by asset owners were how managers define engagement, and having access to data on engagement.

The stewardship figure tells RI that, when they ask for evidence of outcome-orientated engagement, managers are able to provide detail through case studies.

“But when you ask, ‘Can you tell me across all the assets you manage on my behalf all the times you had engagement objectives associated with your conversations, any progress against objectives and any escalations?’, then its pears, bananas and apples.”

“It’s really hard to fluff or greenwash us with good news stories because we’ve set out really clearly the exact information that we want to hear, and that has made a massive difference”

Jacqueline Jackson
London CIV

The person also flags the lack of a standard or agreed definition on what can be labelled engagement, rather than just a meeting or a request for information. “We’re big supporters of separating them.”

The asset owner’s analysis found that its managers had engaged 3,200 times with 1,400 firms, but only 17 percent of those interactions had engagement objectives associated.

“This is too low so we sent letters to our investors letting them know where we felt they showed gaps in the way they were tracking their engagement activities and what we would like to see more of next year,” the person says. “And we’re having one-to-ones with the five largest managers on the back of this letter.”

Sheila Stefani, head of stewardship at £55 billion LGPS Central, says a key difficulty for the pool is organising data from different managers to see the big picture. The Financial Conduct Authority has launched a consultation on a standardised vote-reporting template for asset managers and Stefani said a similar initiative for engagement reporting would be useful.

She adds: “It will be helpful in order to understand what peers are doing. It will be easier for asset owners to challenge managers when they can see the trend of data. At the moment I can only talk about my own votes.”

The £27 billion LGPS pool London CIV has mitigated its data problems by introducing a strict reporting standard. When it started carrying out RI work in 2020, “we got a lot of good news stories about engagement functions”, says Jacqueline Jackson, head of responsible investment. “That was not particularly helpful – it didn’t necessarily tell us what we needed to know in terms of clear data and specific votes.”

The fund now requires managers to fill out a detailed proprietary form each quarter. “It’s really hard to fluff or greenwash us with good news stories because we’ve set out really clearly the exact information that we want to hear, and that has made a massive difference,” she says.

Managing managers

As to how receptive managers are when concerns are raised, it appears they are generally forthcoming. “They are all sending their best, most senior people,” says Nazarova-Doyle.

However, she anticipates that the UK Asset Owner Roundtable review will be “very telling”. “If what we suspect transpires, I think it’s going to be very difficult for managers. Willingness to answer questions does not make up for the fact that their voting goes against the IPCC pathways.”

There is – to a degree – sympathy for the challenges managers face. As Aegon’s Komulainen notes, some clients will not particularly be interested in net zero, “so managers are torn trying to juggle an array of stakeholder interests”.

An obvious challenge is the US anti-ESG backlash, which is forcing managers operating in the market to balance very opposing views.

For Nazarova-Doyle, however, it should not detract from managers’ climate and ESG efforts. “Managers really need to do some soul-searching, because in this environment they can’t be everything to everyone. They need to decide what they stand for and what their investment philosophy is and anchor their actions in their investment philosophy.”

London CIV’s Jackson agrees. “Managers should rather consider that they could be losing business by not actually taking a stance.”

Incoming escalation

Given the growing frustration that managers are misaligned with their values or not moving fast enough, some asset owners are looking to escalate their concerns.

A number of funds told RI that, while they were not currently escalating, they had emphasised that stewardship forms part of manager assessment and retention.

“Managers really need to do some soul-searching, because in this environment they can’t be everything to everyone”

Maria Nazarova-Doyle
Scottish Widows

LGPS Central has already taken action to address concerns that the ESG backlash is making some managers “more restrained”, Stefani says. In response, the pool has increased the frequency of reporting it expects from managers. For example, where they might previously have expected a quarterly update on stewardship, this has now increased to monthly.

Sophie Johnson, head of governance and proxy voting at Royal London Asset Management, acknowledges that newer clients in particular are asking for more frequent and detailed reporting.

Around half of RLAM’s assets belong to its parent, Royal London Group, and Johnson says the management wing is receiving more scrutiny than it was two years ago.

“It’s now a much closer relationship,” she says. “They are much more involved on what they think are the most important meetings for them, things that are particularly high profile, and we have many more conversations about how we vote, their views and making sure there’s an alignment there.”

Meanwhile, the anonymous large asset owner is taking voting in-house for segregated mandates in passive and enhanced index strategies in 2024. Active strategies will be left alone for the moment – the owner said they did not want to invalidate the active investment process where integration, voting, and engagement are connected and feed into each other.

Having taken passive mandates in house, the owner will continue to monitor voting across its investments. “If there’s consistent increase in deviation, our escalation will be to take everything in-house,” the stewardship figure says.

Split on split voting

Transferring voting power to asset owners may address misalignment, but not everyone is convinced of its usefulness

The advent of split voting has made it easier for asset owners to take control of their own voting. While some schemes had the ability to vote their shares already due to being in segregated mandates, a number of the largest managers are now offering the ability to direct votes in pooled funds.

Nazarova-Doyle has been at the forefront of pushing for more action on split voting by asset managers. She says Scottish Widows is “very pleased” with voting choice.

London CIV’s Jackson plans to speak to proxy voting specialist Tumelo and bring together an alliance of asset owners to write collectively to managers asking them to enable split voting. “In the absence of voting in line with our policy, that could be an interim solution that would work well,” she says.

Aegon is unsure that split voting is “the silver bullet” to fix the problem of voting misalignment. However, Komulainen says there was scope for asset managers to provide more opportunities for client views to be reflected in voting and engagement policies. “If you’re not listening to your clients when it comes to the setting of your policies and beliefs and how you act, it becomes more challenging to demonstrate how you are acting in the best interest of clients.”

While split voting does give asset owners greater control, both owners and managers say it can reduce the effectiveness of manager stewardship.

Martindale warns of the importance of having investment decisions, stewardship and the vote itself as part of a joined-up strategy. There is a temptation to separate the vote or even wider stewardship from the investment decision, he says, “but the challenge is this then potentially could disenfranchise the asset manager from good-quality stewardship”.

This concern is echoed by Ashley Hamilton-Claxton, head of responsible investment at Royal London Asset Management. She acknowledges that there are reasons why asset owners, especially those with passive mandates, may want to direct votes. “But at an active house such as RLAM, our voting is very much tied in to our investment decision and our engagement of the company,” she says. “What I worry about is, if you’re taking the vote off your asset manager, you limit your ability to escalate.”

The ability to direct their own votes does not fully address concerns raised by asset owners about wider stewardship actions.

When BlackRock highlighted its voting choice service in a dispute with the Missouri State Employees Retirement System over proxy voting, a spokesperson for the state’s treasurer told RI: “We don’t have confidence that BlackRock’s advocacy interactions with the companies on issues outside of the proxy voting process would align with the goals of MOSERS’ proxy policy.”

Nazarova-Doyle stresses the importance of engaging with managers on their own voting. “It’s untenable because all of these risks are materialising. They’re going to come and bite us in our portfolios and affect our beneficiaries. As long as we have a relationship with these managers, we’ll absolutely engage with them.”