The problem with ShareAction’s 2015 Asset Manager Responsible Investment ranking

A good report, but it should have been named the Stewardship and corporate governance ranking.

What gets measured gets managed is the oft-heard mantra. And so it should be with responsible investment. Encouragingly, many asset owners and asset managers are now signatories to initiatives such as the PRI and the UK Stewardship Code; and Principles and Codes need measuring against to ensure savers can see why the organisations that are managing their money are signing up, and how they are performing. Indeed, the 2010-launched Stewardship Code has commitment hard-wired into it given that the UK’s Financial Conduct Authority (FCA) under its Conduct of Business Rules requires all UK-authorised asset managers to comply and produce a statement of commitment, or explain clearly that they don’t comply.
The Financial Reporting Council, which oversees the implementation of the Code, has admitted it is “concerned about the state of commitment” to the code and that this year it will “undertake greater scrutiny” of adherence to the code, and maybe even kick out those asset managers that are not adhering in practice. Good: that’s regulatory oversight in action. It should be remembered, however, that the Stewardship Code is ‘guidance’ not rules based.
Which brings us to this year’s UK Asset Manager Responsible Investment Ranking 2015 by ShareAction, the NGO-backed lobby group for responsible investment. It’s a serious piece of work on Stewardship and corporate governance practice, which is required reading.
It should guide the FRC on where asset managers are signing up to the Stewardship Code and not committing.
Unfortunately, it is less of a ‘responsible investment’ ranking. We think that is problematic.
Most press coverage so far has done a standard laggards/leaders comparison of the ranking, and it’s set up to be interpreted that way. It’s what journalists tend to do. That’s not ShareAction’s fault. But it is what most readers will take away from the coverage of the report.There is, however, an implicit problem in the scoring methodology that ShareAction has applied to asset managers.
From a possible total tally of 143 points based on public disclosure and responses to a survey (of which 24 fund managers responded out of the 33 managers asked), at least 86 are based on Stewardship Code responses, and another 28 on investment horizon and remuneration. All of these are important criteria to a responsible investment ranking, but it’s unrealistic to suggest they make up more than two-thirds of a score.
Let’s take, for example, one of the bottom five ‘laggards’, UBS Global Asset Management. At the end of 2013, it had SRI assets of CHF 576bn, or 24% of its total invested assets. It runs a number of themed funds including climate change, water and energy efficiency, and has launched a number of SRI exchange traded funds. It’s hard to see it as an RI laggard, even if it didn’t respond to the ShareAction report, which is unfortunate.
Where the ShareAction report does hit the mark is in pointing out that while 100% of the managers assessed are signed up to the Stewardship Code, and that almost all (96%) say they conduct stewardship because it affects investment returns, only 36% have a policy on potential conflicts of interest. This is vital in a financial world of multiple connected business relationships where companies rarely want to criticise peers openly, especially where other parts of the company could be affected: say for example, a corporate that has a separate relationship with the investment banking sister of an asset management house.
And only 15% of these same Stewardship policies explain both when and how ‘collective’ engagements would be conducted. This was part of the initial volition of the Stewardship Code and features heavily in the FRC’s work with the Investor Forum created under the Kay Review for just such joint action. Only 39% of the asset managers examined had a policy on ‘non-public
material information’ and engagement – a difficult issue for investors – but which if not clarified renders collective engagement meaningless, and even dangerous. So the report flags up some serious hurdles for the FRC to address in the Code. The report is also encouraging on the quality of voting disclosure. It says 64% of managers now disclose detailed reports containing why and how they voted (against just 24% back in 2010), with the same number getting an independent evaluation of that voting. Another positive finding is that 96% of survey respondents now report to clients on the turnover rate for companies in their portfolios, and 83% report on the costs associated with this. This is a good sign, although numbers like these need to be seen against the investment strategy of a fund manager for context.There is much to be applauded in the report. We believe that more, not less information on investment strategies, performance and responsibility is vital for an industry that is fast moving from collective defined benefit arrangements to individual defined contribution schemes. As the report points out, in the UK alone that could mean over 12 million ‘personal’ retirement savers by 2018. Stewardship should be a key part of consumer information on how that money is being looked after. The report is less convincing, however, in covering the waterfront of responsible investment strategies in a meaningful way. As ShareAction expands its important work into Europe and beyond, that needs to be looked at. What gets measured is, after all, as important as what gets managed.