UK AOs Probe Misalignment After Failed Fossil Fuel Votes

Assets owners aim to address “obstacles and challenges” to climate stewardship alignment to accelerate decarbonisation efforts.

UK asset owners are investigating the extent of and reasons for stewardship misalignment with asset managers following a “challenging” AGM season that saw oil and gas majors backtrack on their net zero commitments.

“There seems to be a misalignment between the way asset managers and the asset owner community were voting,” said Faith Ward, the roundtable’s current Chair of the UK Asset Owner Roundtable and Chief Responsible Investment Officer at Brunel Pension Partnership (BPP), one of the UK’s eight pooled local government pensions schemes.

After a series of AGMs in which asset managers appeared reluctant to oppose boards on climate-related votes, an alliance of UK asset owners, including the Church of England Pensions Board (CoEPB), Scottish Widows and the People’s Partnership, commissioned Andreas Hoepner, Professor of Operational Risk, Banking and Finance at University College Dublin, to research and report on the key drivers of stewardship misalignment on climate.

According to Hoepner, the research will examine investor stewardship at all oil and gas companies tracked by the Transition Pathway Initiative (TPI). Research will span the introduction of the Paris Agreement in 2016 to the conclusion of the 2023 proxy season, with the aim of comparing the voting patterns of asset owners and managers.

The research will also leverage more than 100,000 pages of stewardship reports to determine the level of alignment between asset owners and managers on climate. 

“By delving into these reports, we aim to uncover the reasons behind any misalignment between stewardship communication and actual voting behaviour,” Hoepner added, speaking at a virtual roundtable organised by the Roundtable on 15 September.

The findings will be presented on the 12 October, with the Roundtable convening a meeting between asset owners and managers to discuss the research with the aim of agreeing next steps to address the misalignment.

Taking stock 

At ESG Investor’s Stewardship Summit in May, asset owners detailed a significant misalignment gap with asset managers, particularly regarding ESG-related engagements.

Several members of the UK Asset Owner Roundtable were among those who pre-declared their intention to vote against the reappointment of BP’s chair in April, only to gather limited support from other investors.

In June, the CoEPB and Church Commissioners announced plans to divest from oil and gas firms, including Shell, ExxonMobil and Total, among others, for failing to align with climate goals.

Ward noted that the timing of the UK Asset Owner Roundtable research is “perfect” given the recent release of the United Nations Framework Convention on Climate Change’s (UNFCCC) synthesis report of the first global stocktake which highlighted how the world is “woefully behind” in implementing the goals of the Paris Agreement.

“This initiative has been initiated by the asset owner community, and it aims to foster collaboration with asset managers,” said Shipra Gupta, Investments Stewardship Lead, Responsible Investment Strategy and Execution at pension provider Scottish Widows, adding that climate-related risks are no longer “distant future possibilities; they are here and now”.

Gupta said the goal of the study is to gain insights into the “obstacles and challenges” that need to be addressed due to climate change concerns having shifted from a long-term issue to an immediate one, impacting the medium-term interests of members.

The focus is on uniting all stakeholders, encouraging “bold actions”, clarifying respective roles within the investment value chain, and collectively driving tangible measures to accelerate real-world decarbonisation efforts, she said.

“Rather than emphasising individual voting decisions, our broader aim is to encourage all parties involved to align their efforts, working collectively and swiftly towards the common goal of addressing climate change,” she said.

“The urgency of aligning and acting collectively at a faster pace is the key objective of this initiative.”

Credible climate stewardship 

Ward noted that the study has garnered significant attention from asset owners and managers in the UK and across Europe.  

Proxy voting service providers including Glass Lewis and Institutional Shareholder Services (ISS) were invited to participate, with the former accepting the offer to contribute to the study, while the latter opted out.  

“We are at a critical juncture in terms of stewardship of the underlying assets,” said Adam Matthews, Chief Responsible Investment Officer at the CoEPB said.  

“It is imperative that managers effectively steward the assets on our behalf, aligning their strategies with the magnitude of the climate challenge,” he added. “This alignment, or lack thereof, serves as a driving force for our involvement in this initiative.” 

Leanne Clements, Head of Responsible Investment at People’s Partnership, a workplace pensions provider with £21 billion (US$26 billion) in AUM, said: “Asset owners have integrated climate into their investment decision making (including stewardship considerations) in the belief that it will create better member outcomes.

“Therefore, a credible and robust climate stewardship strategy is essential to achieving this aim, and the absence of this creates increased risks to our portfolio.  If fund managers of externally managed asset owners are not meeting this requirement, it represents a serious misalignment with our long term interests. This is an important backdrop and driver as to why this workshop was created.”

According to Gupta, despite some asset owners, including Scottish Widows, adopting split voting or voting choice services, this should not lead to asset managers curbing their stewardship on climate. 

“As long as these big passive fund managers remain on the shareholder register, they still remain a systemically important engagement focus for asset owners like us with regards to their voting behaviour and notably voting escalation,” added Clements.

The UK’s Financial Conduct Authority’s consultation from the Vote Reporting Group closes on 21 September 2023. The consultation aims to create a voluntary, standardised and comprehensive ‘vote reporting template’ for asset managers to communicate to asset owner clients on their voting activity.

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