Asymmetry of Power

Hilkka Komulainen, Head of Responsible Investment at Aegon UK, discusses its approach to ‘expression of wish’ and how the asset owner’s voice in pooled funds is getting louder.

Despite asset owners increasingly demanding a louder voice, particularly on sustainability-related issues, many asset managers continue to exercise caution when it comes to giving clients in pooled funds the ability to vote their shares.  

In September 2021, the UK’s Taskforce on Pension Scheme Voting Implementation (TPSVI) laid out its recommendations on how to strengthen the asset owner’s voice to drive “safer, better and greener pension schemes”, with asset managers encouraged to engage with asset owners invested in pooled funds on their voting preferences.   

The TPSVI report noted that there are “significant problems with stakeholder attitudes” and criticised the “asymmetry of power” between pension schemes and their asset managers. It also noted that while IT systems were cited as a barrier to addressing the problems in the voting of equity shares by pensions schemes, it cannot be allowed to “slow progress”.  

Hilkka Komulainen, Head of Responsible Investment at Aegon UK, tells ESG Investor that the TPSVI played a vital role in driving an important conversation about voting, one that applies directly to the firm as one of the largest asset owners in the UK and a predominantly pooled fund investor.  

“I still find that asset managers have very different views and approaches on how much they welcome asset owner views,” says Komulainen, noting that the industry is yet to land on a perfect model to address the issue, but acknowledging that the TPSVI’s recommendations represent a crucial step in reaching that end goal.  

It is a conversation that finance industry is still in the middle of figuring out, with the TVSPI report outlining ‘expressions of wish’ as an interim solution, whereby an asset manager captures and considers the voting preferences of their clients (institutional and retail investors) but retains the right to vote themselves.  

“The expression of wish allows for a very clear and straightforward perspective from the asset owner to be communicated to a manager,” says Komulainen. “I also believe it leverages the strengths of each player in the value chain.” 

Expecting a degree of opposition and resistance from the market to rapidly offer expression of wish or equivalents to allow asset owners their say in how their pooled fund votes are exercised, the TPSVI noted that the only alternative would be to ask the Law Commission to propose legal frameworks to give investors the necessary rights – labelling it the “nuclear option”. 

“This is about giving pension savers a voice in how their hard-earned savings are being looked after,” according to then-Minister for Pensions and Financial Inclusion Guy Opperman after the TVSPI report was released.  

“I see no reason why trustees shouldn’t be able to determine their own high-level policies – on areas such as climate risk management, diversity, or pay – and find an asset manager to implement it.” 

Being heard 

While Aegon UK is certainly not a small asset owner, with over £200 billion (US$249 billion) in AuM, voting still requires significant resources and expertise, says Komulainen, noting that there are tens of thousands of voting actions in the firm’s master trust alone.  

Some pension schemes may undertake this task in-house, she says, but it is not accessible to everyone, especially smaller teams and trustees heavily reliant on consultants.   

Aegon UK recently outlined its approach to voting as an asset owner and indirect investor, with it developing its voting preferences based on its stewardship framework, propriety research and engagement with asset managers.  

“To effectively fulfil the role of an asset owner, providing accountability to the asset manager is essential,” she says.  

Through ‘expression of wish’ Aegon signals its position against companies in advance of AGMs, sharing its voting preferences shared with key asset managers. “In our execution of the expression of wish, we select specific resolutions,” she says. “This approach offers a clear and unambiguous indication of alignment between the asset owner and manager.” 

The expression of wish allows Aegon to exercise its influence as an asset owner on the larger company stock holdings of its principal asset managers. 

According to Komulainen, the level of alignment between managers’ votes and its ‘wishes’ is a key consideration in its oversight of asset managers, with consistent misalignment serving as a trigger for further engagement or escalation in key areas of divergence with its asset managers. 

The strength of the asset owner-manager relationships also plays a significant role in the level of alignment too.  

“Success can be hit or miss depending on the strength that relationship,” she says. “Alignment between portfolio management and stewardship teams still needs work.” 

Higher standards  

As the providers of capital, asset owners sit at the top of the investment value chain. Data from the UN Principles for Responsible Investment (PRI) shows that sustainability considerations are often missing from asset owners’ due diligence processes, in particular from the selection, appointment and monitoring of investment managers.  

In fact, less than half of PRI asset owner signatories include specific guidelines on environmental and social issues and, in many cases, investment mandates lack detail on asset owners’ specific ESG expectations of their managers.  

This highlights that both asset owners and managers play their part in the level of alignment on ESG-related issues, with both still adjusting to the former finding its voice.  

For a long time, there was a view that asset managers, given their role in identifying investment opportunities or assessing companies, should also manage externalities or sustainability performance as a concomitant risk management function, explains Komulainen.  

However, the view that asset owners can’t just delegate that responsibility in the same way as they delegate their investment management activity is emerging. 

“The asset owner’s voice in this space is getting stronger, but it’s still emerging,” she says. “It has only been in the past few years that a critical mass of asset owners have had as much expertise and resourcing to make their voices heard. 

As asset owners, we need to hold ourselves to a higher standard when engaging with asset managers, just as we hold them to a higher standard – there is room for improvement in both areas.” 

Information flow 

In November last year, the Financial Conduct Authority (FCA) established the Vote Reporting Group, with the aim of examining the obstacles to the flow of information from asset managers to asset owners with regards to exercising voting rights, with the former still struggling track if their ‘wishes’ are being met by the latter.  

The Vote Reporting Group aims to design a comprehensive and standardised vote reporting framework for public consultation in mid-2023. The FCA believes that a standardised, industry-agreed approach will reduce the level of ad-hoc vote reporting to clients and make vote reporting more consistent and easier to compare. 

Komulainen believes that a standardised vote reporting framework will provide “huge value” by bringing greater transparency and consistency to how asset managers vote on behalf of their clients as it will help asset owners to hold them to account on their stewardship capabilities.  

“We have over 40 asset managers,” she says. “Reading all their stewardship reports and routine bulletins is quite a lot of work – having it standardised will be really useful.”  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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