UK asset owner review finds growing stewardship misalignment with managers

Misalignment could be due to conflicts of interest, cultural differences and disagreement on stewardship approaches, study suggests.

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Average asset manager alignment with asset owners has dropped since 2015, but at the same time a “stronger divergence in views took place within the asset manager community”, according to academic research published on Tuesday. 

In May, the UK Asset Owner Roundtable – which includes the likes of Brunel Pension Partnership, Scottish Widows and the Church of England Pension Board (CEPB) – flagged concerns about a perceived misalignment between asset owner long-term interests and how investment managers are exercising proxy voting at key annual general meetings. 

The group commissioned Andreas Hoepner, professor of operational risk, banking and finance at University College Dublin, to conduct an academic review of the issue.

The report studied votes cast by 12 asset managers from 2015 to 2023 at major oil and gas companies and correlated them “with the equal weighted average of asset owner voting instructions as contributed by the 10 participating asset owners”. These included Brunel Pension Partnership, NEST, Scottish Widows and USS. 

The review also looked at voting rationales provided by asset owners and managers, as well as reviewing the success of ESG engagement across relevant issuers.  

Improved alignment

Six of the managers with lower alignment to begin with were less aligned with asset owners in 2023, but alignment generally increased in 2023 for those firms which were better aligned over the whole period from 2015.

The reports suggests that, although on average alignment has dropped since 2015, a stronger divergence in views took place within the asset manager community. “[This] could represent a shift between sustainability specialist and generalist asset managers and/or a reflection of the well-funded anti-ESG campaign.” 

Misalignment was also more pronounced at oil and gas firms in the Americas compared with European issuers. Hoepner suggested the lower misalignment in Europe could be due to a “great coherence of (political) views on ESG and in particular climate change mitigation in Europe”. 

Regarding US issuers, the report found that for at least two participating asset managers, there was not only a substantial misalignment but “a fundamental disagreement… as to what kind of AGM resolution is desirable at all”. 

Responding to the findings, Leanne Clements, head of responsible investment for People’s Partnership, said: “We have reached an impasse with respect to net-zero stewardship and we are running out of time.

A complete dismantling of failed status quo approaches to stewardship is needed by the fund management industry, with voting escalation not seen as a ‘last resort’ approach used on an exceptions basis, but rather a powerful signal to companies of what investors expect of them.

Cause of misalignment

Based on his findings and a roundtable between asset owners and managers in October, Hoepner suggested five explanations “which can jointly explain the misalignment to a significant extent”.

Firstly, he posited a conceptual disagreement on the most effective approach to stewardship, with some managers seeming to see voting and engagement as mutually exclusive “and appear[ing] to fear the loss of access to management if they voted against management”. 

“This is somewhat surprising as no large-scale evidence exists of conflicts between voting and engagement, but may be attributable to individual engagement tactics. It would be key for those asset managers which perceive significant conflict to make this rather explicit in their stewardship disclosure,” Hoepner said.

He added that some service providers offer institutional investors carefully worded, carefully balanced voting rationales “which weight the merits of both sides of the argument but eventually favour corporate management over asset owner”.  

“In this sense, asset manager misalignment may – to some extent – be outsourced,” he said.

Stewardship governance

Another potential reason for the misalignment could relate to stewardship governance, as asset managers and the financial firms which own them tend to “have many more commercial relationships with the issuers than the asset owners whom the asset managers serve”, the study said.   

For instance, an asset manager may manage a corporate pension fund or might be owned by a bank whose investment bankers have a strong fee track record with the issuer. 

“We cannot study this with respect to all potential financial conflicts of interest without much better disclosure of such conflicts of interest as part of routine stewardship disclosures,” Hoepner said.

He added that standard academic databases “allow us to investigate if those asset managers for whom a selection of conflicts of interest are known display a stronger misalignment with asset owners for those firms where they are conflicted”.

Other possible causes of misalignment included a potential misunderstanding of the relevance of stewardship and voting or the urgency of climate change as a key priority theme within stewardship.

Such a misalignment “could have led to insufficient resource allocation to stewardship which might explain misalignment due to a lack of attention or the quick fix style engagement pattern”, the study said.

Hoepner set out a series of possible further studies which could better evidence particular reasons for the misalignment.

These include an analysis of whether managers which display patterns of resource-stretched behaviour, such as strong inclination to copy and paste from proxy advisors, are more misaligned than those which do not display such patterns.