Written By: Stephen Hearle
When it comes to ESG investing, engagement is a key way to influence companies. But there is another very effective way to influence corporate behaviour – voting, says Stephen Hearle at Nordea Asset Management UK
Asset managers have the power to help companies improve the management of their environmental, social and governance risks. Many would argue, in fact, that it is part of an asset manager’s fiduciary duty to its investors. The industry is coming to realise that this is an important part of safeguarding the long-term interests of both shareholders and society.
Asset managers implement ESG elements in many ways, but – true to its name – active ownership is one of the key ways investors can influence the companies they invest in. Active ownership, a term we hear increasingly frequently in the industry, typically means engagement, participating in investor initiatives, and voting. Engagement is often the more high-profile of these because asset managers can use it very effectively to address their key concerns, either individually or by joining forces with other investors. Engagement can include meetings, letters, field trips and other interactions, but they all are ways of going to a company with a specific agenda and guiding it through milestones until the business improves its performance in a given area. This can be very effective, extremely rewarding and makes a good story, but it’s important not to underestimate the impact that voting can make.
Not all managers vote, and when they do, they may be very selective in how or which actions they vote on. The 2021 Voting Matters report by ShareAction, examining large asset managers’ voting performance on Environmental and Social resolutions, revealed that many asset managers miss out on opportunities to facilitate real change by not voting.¹
Initiatives like CA100+ and NZAM are one way investors influence corporate behaviour
Climate Action 100+ is a global investor initiative on climate change launched in 2017. The initiative’s aim is to engage with the 100+ companies that are most critical to the transition towards net zero emissions. CA100+ has over 700 signatory investors representing USD68 trillion of assets under management², and is one of the largest investor-driven climate initiatives to date.
The Net Zero Asset Managers initiative launched in December 2020 to spur asset managers to commit to a goal of net zero emissions. It is a stewardship and engagement strategy, with a clear escalation and voting policy, that is consistent with ambitions for all assets under management to achieve net zero emissions by 2050 or sooner. Net zero refers to the aims of reducing greenhouse gas emissions and fully offsetting the remaining emissions by activities that remove greenhouse gasses from the environment (such as planting trees). By December 2021 the initiative had 536 signatories who together represented USD57.5 trillion under management.³
Initiatives and engagements are only part of the story
According to the 2021 ShareAction report, overall voting performance across the asset management industry is unimpressive. Even in ESG and climate resolutions, an area of growing investor interest, industry performance is notably poor. Just 21% (30 of 146) of environmental and social resolutions assessed received over 50% support in 2021, which was little changed from the previous year.⁴
When it comes to climate, the proportion of ‘for’ votes on climate resolutions by each asset manager, including those who are members of Climate Action 100+ or the Net Zero Asset Managers initiative, is broken down in the 2021 ShareAction report.⁵ Surprisingly, only three managers generated a 100% score, despite the fact that many asset managers and asset owners are pledging to support green agenda initiatives. The report goes on to point out that “although the voting performance of the industry as a whole remains stagnant, some individual managers have shown substantial improvement.”
Voting for change
What is becoming increasingly clear is that voting and engagement can overlap. Engaging with investee companies to influence outcomes is nothing new, and increasingly managers are using engagement to address material sustainability risks and opportunities. Investor actions can make a meaningful difference – but they are not limited to engagements. Voting is a powerful, but often overlooked, way that investors can bring about change.
ExxonMobil is a good example of this. Investors filed a proposal requesting that the company begin reporting on how its direct and indirect lobbying aligns with the Paris Climate Agreement goals. Increased disclosure has taken place within the sector on this topic and industry participants used this resolution to encourage ExxonMobil to align themselves with best practice. Other shareholders clearly welcomed the idea of additional information on the company’s lobbying activities and trade association memberships, and this resolution was passed on 26 May 2021.
Putting your mouth where your money is
The asset management industry has a vital role to play in addressing climate change and other pressing issues. As an industry, we should be using every tool we can to bring about the needed change. Many investors carry out high-profile engagement activities, but voting is another crucial way they should be guiding company behaviour. Asset managers who wish to be credible in their drive for sustainability need to ensure they can use their votes. Proxy voting is an effective and public way to influence companies in the right direction and drive real-world change.
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1. Voting Matters 2021 by ShareAction examined how 65 of the world’s largest asset managers voted across 146 social and environmental resolutions in 2021.
4. Voting Matters 2021 by ShareAction
5. ibid page 40 & 41