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US asset managers not really getting behind the ESG agenda

A new report from Robeco shows that asset managers are yet to truly embrace sustainability.

The research – covering a decade of US shareholder voting by the largest 50 asset managers – reveals that the number of submissions brought forward on environmental and social issues has remained consistently low, less than 1% of all proposals.

Proxy voting is a powerful tool for shareholders to steer corporate agendas towards sustainability-focused decision making.

According to Robeco, despite the increased attention to the integration of sustainability in investment solutions, asset managers generally vote against environmental and social proposals.

This trend is more pronounced among large and passive players.

For passive managers, cost pressures have led to standardisation across engagement and voting operations in a bid to minimise expense ratios.

David Czupryna, head of ESG development at Candriam, also points out that a growing share of investments, particularly in the US, are managed passively. “When an investor commits to replicate a market cap-based index, their ability to take sustainability considerations into account is very limited.

“Passive investing based on market cap-based indices, where investors have to hold certain securities, makes it difficult to apply pressure on companies, as investors will be able to sell their positions, no matter what the result of the vote/engagement is.”

Voting action

The Robeco report also indicates that signing up of the United Nations-supported Principles for Responsible Investment (UN PRI) initiative has unfortunately not made a tangible difference to voting action.

These managers did not vote more in favour of sustainability-related proposals than those outside of the network.

This is despite the ESG-focused guiding principles they ascribe to when they join the organisation.

Wilma de Groot, head of core quant equities at Robeco, argues that in order to ‘walk the walk’ instead of ‘talking the talk’, asset owners can encourage their managers to increase the number of proposals filed on environmental and social topics.

“This may be an important first step as the currently low figures could be sending a negative signal to directors about the importance of these issues. Asset owners can also make the assessment of sustainable voting practices an integral part of their manager selection, due diligence and monitoring.”

She accepts that filing numerous shareholder proposals is a daunting task for asset managers, given the sheer number of listed companies and the vast amount of work involved. But says: “We believe these obstacles can be addressed if asset managers join forces and mutually coordinate the steering of corporate agendas. Such coordination may even lower the costs of these activities for each manager, while increasing the impact on corporate decision making.”

As a final recommendation, de Groot suggests regulators make the central filing of voting records mandatory for asset managers and owners. This information may then be made publicly available.

“If voting records are disclosed, the beneficial owners (eg pensioners) will be able to see to if their asset managers are truly deploying their money in a sustainable manner,” she argues.

Stewardship

Given the findings of the Robeco report, are asset managers failing to exercise their stewardship responsibilities as an integral part of their sustainable investing approach?

As far as Adrie Heinsbroek, chief sustainability ifficer at NN IP, is concerned many asset managers are taking their stewardship responsibilities increasingly seriously.

“We regard voting and engagement as one of the most effective ways for shareholders to communicate both successes and concerns about a company’s performance or corporate strategy. We strongly believe voting is a tool to encourage companies to change towards more sustainable business models and believe voting is an instrument to hold management accountable to shareholders. Voting is therefore an integral part of NN IP’s approach to responsible investing”.

But he concedes that “there are asset managers who still believe that voting and ESG policies can hinder engagement conversations”.

“In our view, ESG policies increase transparency and spark deep and meaningful conversations. By voting, one underlines the views expressed in engagement conversations, or by voting you can start a meaningful conversation with a company.”

He adds: “Unfortunately many asset managers see voting as a defensive mechanism whilst it is neither that nor an attack mechanism but a clear expression of the direction a company should steer on in the view of a shareholder.

“Companies should value this open and clear statement of investors more as it provides them with opportunity of understanding the view of shareholders and opportunities for value creation.”

US and EU differences

Greta Fearman, senior responsible investment officer at Actiam, sees things in a similar way to Heinsbroek but points out the difference between US and European investors.

“In some cases managers even go against the proxy advisor recommendations and vote down resolutions on important environment and social issues, stating that they prefer to engage with the companies directly or privately. The US Department of Labor rulemaking on investor duties and the discussion on whether pension funds are allowed to consider broader stakeholder and ESG issues as part of their investment decisions could be partly to blame for this.”

She adds: “The unclarity around whether it is consistent with their fiduciary duties to make these considerations could pose a barrier and lead to votes against ESG resolutions. This is in contrast with European asset managers who are leading the way on supporting environmental and social resolutions, likely driven by client demand and regulatory action.”

Fearman points out that, while regulations like SFDR in Europe have introduced initial reporting requirements for asset managers to explain how they integrate sustainability risks and provide statements about engagement policies, perhaps future iterations could require additional disclosure on voting related activities.

“This would provide the transparency needed for asset owners to more easily target questions to their managers.”

This would represent progress but as Heinsbroek stresses, it is not the be all and end all: “It is important to note, voting itself is an instrument. It needs to be followed up by actions from asset managers and hence voting is not a standalone activity but an integral part of the Responsible Investing approach and way of working.”

Editor’s Note: In association with our sister publications, Expert Investor has launched a Campaign for Better Governance.

It will see us shine a spotlight on investment companies as well as the businesses in which they invest.

Full details can be found here.

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