Europe

Voting Policies Offering Asset Owners Closer Scrutiny

European asset managers leading US counterparts in setting out voting intentions.

Asset managers may not have voted in large numbers for ESG-focused shareholder resolutions at this year’s AGMs, but asset owners are at least attaining greater visibility of their intentions and rationales.

New reports paint a mixed picture of the US AGM season in particular, regarding support for proposals on carbon emissions disclosures and fossil fuel financing, among a wide range of climate and other ESG topics.

Proxy Preview’s tally of environmental, social, and sustainable governance shareholder resolutions found that the same number (34) had achieved majorities as at the equivalent point in last year’s US AGM season.

According to Morningstar data on US proxy voting, the number of shareholder resolutions on environmental and social topics opposed by management almost doubled to more than 250 in 2022, but barely 10% (27) gained majority support.

However, the funds, data and analytics provider also found that asset managers are being increasingly transparent in advance of voting, through stewardship reports, more granular policy statements and more specific voting guidance.

Based on voting policies and related documentation from 25 leading US and European firms, a new Morningstar report says asset managers are making policies “more detailed and specific” on environmental and social themes.

This is giving asset owners “better sight” of managers’ stances on key issues, which can help them to select those “best aligned” with their objectives.

Lindsey Stewart, Director of Investor Stewardship Research at Morningstar, said disclosures from asset managers are giving asset owners a clearer insight into their approaches.

“Increasingly, we’re seeing asset managers start to disclose the rationale behind their thinking. And that can only be a good thing for asset owners who are looking for managers who will invest in line with their non-financial as well as financial goals,” he said.

Europe leads the way

According to the Morningstar analysis, there is a distinct difference between European and US managers, with the former generally scoring much higher for the clarity and detail provided in their voting policies.

Nine European asset managers were rated as having a high or very high focus on environmental and social issues, with Allianz GI, BNP Paribas, Fidelity International and LGIM scoring highest. Eleven of the 12 US asset managers were assessed as having a medium or low focus. The three dominant passive investment houses – BlackRock, State Street and Vanguard, were all rated medium. All 25 are signatories of the Principles for Responsible Investment.

“Most of those managers at least got a medium focus in our report. They have really stepped up,” said Stewart. “Managers are prepared to request that specific targets be hit and indicate what their voting intentions would be for both management and shareholder proposals.”

Early in the US AGM season, BlackRock indicated it was less likely to vote in favour of climate-related shareholder resolutions than in 2021, on the grounds that many on this year’s slate were too prescriptive. According to Stewart, BlackRock’s position was not out of step with other managers. The firm is also one of several managers experimenting with ways to enable institutional clients to vote directly on shareholder resolutions.

Managers with a high or very high environmental and social focus include “detailed and specific policies on several aspects of climate policy”, the report said, and often cover other environmental themes such as biodiversity, natural capital, deforestation, and water usage.

Firms at the higher end of the spectrum typically also outline in detail their rationale, targets, and voting intentions on diversity, equity and inclusion as well as human capital management issues, often advocating also for greater representation on boards. They generally have detailed policies for human rights and labour rights, Morningstar found.

Stewart said firms awarded lower rankings had provided less detail about the frameworks and thinking behind their voting decisions, making them less valuable in predicting actual voting outcomes.

In terms of drivers of geographic distinctions, he cited the recently strengthened UK Stewardship Code as one reason why European firms generally outperformed their US counterparts on clarity of voting policy.

Other factors included European regulatory developments such as the Sustainable Finance Disclosure Regulation and the Non-Financial Reporting Directive, soon to be replaced by the Corporate Sustainability Reporting Directive, which have increased the flow of disclosures by asset managers and corporates on environmental and social risks.

Morningstar also noted a stricter shareholder value-led approach to US asset managers’ engagements with investee firms, as well as a “narrow definition” of fiduciary duty requiring managers to focus on maximising financial returns.

Increasingly vocal

Voting policies typically outline the principles informing asset managers’ voting decisions at AGMs and as such are a core element of any managers’ active ownership strategy.

Initially governance-focused, outlining voting expectations around board composition, remuneration, shareholder rights, reporting and controls, they’re increasingly a valuable indicator to asset owners of their approach to key environmental and social themes.

Asset owners have become increasing vocal over their expectations for manager support of ESG-related shareholder resolutions, with a particular focus on their climate voting records.

Last November, a group of UK-based asset owners published the COP26 Declaration, outlining minimum standards for asset managers’ net zero strategies, across AUM coverage, exclusions, voting practice, engagement escalation, regular disclosure of holdings, voting record and engagement.

“Voting records should be published as soon as possible after the AGM and include rationales on votes against management as well as votes on shareholder resolutions,” said the declaration, which also requests disclosures on managers’ broader engagement activity, including engagement objectives, methods of engagement and escalation, as well as assessments of progress and outcomes against defined objectives.

Separately, the UN-convened Net-Zero Asset Owner Alliance published a guide to climate-related voting, which made similar calls for increased disclosures around voting records and rationales, to provide institutional clients with greater “transparency, consistency and accessibility”.

Firms from both sides of the Atlantic have stepped up their volume of pre-declared votes this year, with Schroders pre-declaring its voting intentions ahead of the AGMs of Alphabet, Amazon and Meta, and LGIM also outlining its voting intentions on ESG issues for proposals at J Sainsbury, Alphabet, Meta, Amazon, Twitter, McDonald’s, JPMorgan Chase and BP.

Employee-owned US investment manager Neuberger Berman has been routinely announcing its voting intentions in advance of AGMs since 2020, via its NB Votes initiative.

Digging into the data

Morningstar’s analysis of voting at US 2022 AGMs across 250 resolutions related to environmental and social topics found that 140 gained the support of more than 20% of shareholders, with just 57 gaining more than 40% support.

Proxy Preview highlighted majorities for resolutions in favour of racial justice and civil rights audits at eight firms, including Apple, Home Depot, Johnson & Johnson and McDonalds. It also noted majorities in the face of management opposition for resolutions on improved reporting at plastics producer Philips 66 and in favour of a formally audited climate plan at ExxonMobil.

“Overall, there’s been a slight dip in the average level of support for those proposals. But if you dig into the data, there are more fairly well supported shareholder proposals, as well as more badly supported proposals.”

The rise in the number of resolutions was in part down to a change in interpretive guidance by the Securities and Exchange Commission (SEC) last November which meant that few resolutions were blocked by company objections.

Further changes to proxy rules from the SEC could result in new developments in 2023, both in terms of the number of proposals and their approach.

“It remains to be seen what will happen in the coming proxy year. Will we see fewer shareholder proposals or will their wording be adjusted to make them more palatable to asset managers to get support?” posited Stewart.

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