Proxy Voting’s Role in Stewardship Can be “Quantified” – Morningstar 

The US-based firm’s ESG Commitment Level report recognises only eight out of 108 asset managers as a ‘Leader’.  

Proxy voting is an important and quantifiable part of the stewardship process, funds data and analytics firm Morningstar has said, amid rising concerns its role can be overstated.   

Morningstar incorporated proxy voting records into its latest report rating managers on their determination to incorporate ESG factors into their investment processes and deliver sustainability outcomes.  

Just eight asset managers out of the 108 analysed earned a Morningstar ESG Commitment Level of Leader, while 21 scored Advanced. The largest group of firms (48) received a Basic ranking, and 31 earned Low.  

Morningstar’s analysts look at three pillars to rate asset managers on ESG commitment: philosophy and process, resources and active ownership.  

Active ownership carries a 30% weighting and takes into account an asset manager’s proxy voting record on ESG resolutions, engagement, policy advocacy and shareholder collaborations.  

Importance of proxy voting  

The weight placed on asset managers’ voting behaviour on ESG proposals, with regards to overall stewardship and ESG commitment, has been the subject of growing debate.  

In January, Paul Lee, Head of Stewardship and Sustainability at investment consultancy Redington, who has had an extensive career in stewardship including roles at Hermes EOS, the Financial Reporting Council and the Pensions and Lifetime Savings Association, said shareholder voting, while important, can be give too much attention, as it is highly visible. “The more important side of stewardship is engagement because that is where you can really be fully influential as an investor,” he said.  

Last week, Kimberley Lewis, Head of Active Ownership at Schroders, told ESG Investor asset managers were under increasing scrutiny for their voting at company AGMs on ESG issues, including rankings, when this “told a very small percentage of the overall story amongst all sorts of different indicators to see if we’re being effective in stewardship”.  

Alyssa Stankiewicz, Associate Director of Sustainability Research, who authored its report, said Morningstar took a broad view of active ownership, which included engagement with the companies, as well as the escalation policy, if it is not reaching satisfactory outcomes, and transparency on this.  

She continued: “We’re also looking at firms that are actively engaged in collaborative engagements. So, we definitely recognise that there are multiple facets. That said, proxy voting is something that we can quantify, and it is a very important part of the stewardship process. Obviously, you’re acting on behalf of your investors when you’re making that vote.” 

Guardrails were in place in Morningstar’s analysis, she explained, to avoid overstating voting’s impact on overall rankings. “We’re looking at key ESG resolutions. We’re making adjustments so that we can ensure and minimise the noise in the data when it comes to proxy voting,” said Stankiewicz.  

In the analysis, firms are evaluated on their support for environmental and social resolutions that received at least 40% support from independent shareholders. “Using that threshold, we think we’re doing a pretty good job of evaluating how asset managers are voting on the resolutions that are getting pretty significant support from the market already. So, we’re trying to remove some of the ones that are overly prescriptive or repetitive in that way.”  

Notably, this proxy season BlackRock and Vanguard have significantly dropped their support for ESG proposals.  

To gain ‘Leader’ status in Morningstar’s analysis, managers have to demonstrate high proxy voting support (well above 70%) for key ESG resolutions and sponsorship of shareholder proposals, along with evidence of participation in long-term engagements with clear objectives and milestones; and collaborative engagements, such as Climate Action 100+.  

Leader status also requires publication of a full vote record and summary of votes on the manager’s website, rationales for significant voting decisions, and engagement report with detailed case studies.  

One ‘Leader’, Australian Ethical, was found to vote in favour of a high number of ESG resolutions, but was criticised for not being transparent on its guidance on environmental and social issues in sector and ESG issues frameworks.  

ESG resource analysed 

The other seven asset managers ranked as ‘Leaders’ were – Affirmative Investment Management, Boston Trust Walden, Domini, Impax, Parnassus, Robeco, and Stewart Investors.  

Along with active ownership, asset managers are rated on resources, including key staff members. In the report, Morningstar noted that Affirmative Investment Management had experienced turnover within its sustainability team, but found that substantial commitment to resourcing is a constant: “In October, Fiona Reynolds joined the boutique from the United Nations-backed Principles for Responsible Investment in an advisory role.”  

Similarly, it is noted that Australian Ethical ‘boasts’ an experienced ethics research team led by Dr. Stuart Palmer, former head of ethics services at Sydney-based St. James Ethics Centre, and that Boston Trust Walden lost long-time senior members Heidi Soumerai and Tim Smith, leaving “the firm’s ESG expertise in relatively new hands”.   

Stankiewicz said on its analysis of resources: “We’re evaluating their tenure, their own expertise and experience within the firm and outside of it. We’re evaluating the depth of that bench, how their time is structure and how their incentives might be structure. We’re also evaluating that for the sustainability-focused portfolio managers. Basically, we try to digest all of the information that we can get our hands on when it comes to the resources that are powering this.” 

She added that Morningstar’s methodology didn’t take “a prescriptive view on whether a central sustainability bench is better or worse than distributed routes throughout the firm”.  

“But we have different expectations depending on the structure that a firm has chosen, where we’re looking on the one hand for strong connectivity between a central bench and the investment professionals, and on the other hand, we’re looking for time to be appropriately allocated so that they make sure that sustainability expertise is continuing to develop within the firm,” she explained.  

The study’s methodology also applies to the investment research team, as well as the stewardship team, if they’re separate. In addition, it looks at ESG frameworks that teams have built, such as ESG research and tracking engagement outcomes.   

On the third pillar that asset managers are rated on, philosophy and process, Stankiewicz said, “Although it’s just one piece of the puzzle, we like to see how a firm’s assets are split between sustainability-focused or conventional strategies. In part, because that tends to be a very strong driver of where the firm will continue to invest moving forward. Where they see their advantage in the market.”  

Morningstar also looks at the firm’s history and philosophy of sustainable investment and their overall investment philosophy.  

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