Conflicts of interest a key cause behind misalignment with asset owners identified in UK Asset Owner Stewardship Review 2023.
Voting misalignment between asset managers and owners stems partly from conflicts of interest arising from the formers’ multilateral relationships with investee firms, according to academic research instigated by the UK Asset Owner Roundtable.
The UK Asset Owner Stewardship Review 2023 was commissioned to explain how asset owners’ long-term interests have been served by their asset managers when exercising their stewardship and proxy voting at major oil and gas firms.
A group of large asset owners decided to explore the issue in the aftermath of a bruising AGM season in which votes on climate-related resolutions and board member elections often reflected divided positions.
In particular, five UK pension schemes voted against the reappointment of BP’s chairman after the firm watered down its net zero transition commitments without consulting shareholders, but were not supported by their managers.
Among the key findings identified by the review was that some asset managers view voting and ESG engagement as “mutually exclusive” and appear to “fear the loss of access” to management at firms.
Another finding was a “substantial divergence” between asset managers’ interpretation of shareholders’ and society’s interests. Some were aligned with asset owners, while others had “fundamentally different” views that “may be consistent with short– term commercial interest but do not reflect scientific evidence”.
Andreas Hoepner, Professor of Operational Risk, Banking and Finance at University College Dublin and the review’s author, told ESG Investor that some voting rationales were “quite brazen”, pointing to the example of one asset manager arguing Scope 3 targets would not be in the “interest of shareholders or society”.
He added that asset owners must be “aware of where conflict of interest issues exists, and deal with them appropriately”.
Conflict of interest concerns
In October, UK asset owners held a roundtable event to explore the potential explanations for the asset owner and manager misalignment, as well as the former’s dissatisfaction with climate-focused stewardship progress more generally.
These discussions factored into the review alongside quantitative – including of participating Asset Managers’ shareholder resolution voting alignment and voting alignment at AGMs – and qualitative analysis in the form of a voting rationale review by selected asset owners and asset managers compared to voting behaviour.
At the roundtable there was a “sense of shock” from participants on the “deep implications” of asset manager deviation, with asset owners collectively emphasising their commitment to “enhancing communication and transparency”.
The review flagged five potential explanations that could jointly explain the misalignment between asset owners and managers.
Among these it was noted that asset managers tend to have a higher number of commercial relationships with issuers than asset owners, which Hoepner described as “potentially conflicting”.
Hoepner noted that while there is less misalignment with specialist asset managers compared to generalist counterparts, conflicts of interest “do not necessarily relate to size”.
The majority of asset managers that participated in the review were found to have opposed asset owners and sided with corporate management in recent votes, with only a minority of asset managers aligned with the asset owners.
A further reason for misalignment is a “conceptual disagreement” on the most effective combination of stewardship processes, with some asset managers appearing to view voting and engagement as mutually exclusive while others see it as complementary.
Cultural and/or political differences were also cited as a contributing factor to asset owner and manager misalignment.
All ten participating asset owners were UK– based – including Brunel Pension Partnership, the Church of England Pensions Board, Nest and Scottish Widows – while the majority of the 12 participating asset managers were either US-based, such as BlackRock, JP Morgan and Vanguard, or EU-based in cases including Amundi and UBS.
Further, the review cited some form of “fundamental misunderstanding” on the relevance of stewardship and voting, as well as a potential “conceptual misunderstanding” of fiduciary duty, as a cause of misalignment.
Hoepner noted that no one cause of misalignment was most prevalent, asserting it was possible to address all contributing factors.
He also said that potential conflict of interest issues could be solved by asset managers disclosing “circular commercial relationships” to their clients.
The review recommended bilateral meetings between individual asset owners and asset managers, as well as the development of stewardship expectations to guide asset managers.
It also suggested future research activities could include owners from other jurisdictions. Potential topics for further research included resource insufficiency, and the interaction between voting and engagement with respect to potential conflicts.