The voting record of asset managers
One of the best ways to change corporate practices with regard to ESG is to engage with management. Shareholders are the ultimate owners of a company and especially large shareholders have enormous sway over a company. There are many ways to influence corporations and their business practices, but one of the simplest, yet most effective is to vote on sustainability initiatives at shareholder meetings.
Anne Lafare from Tilburg Law School examined the voting behaviour of a large group of asset managers, asset owners, and proxy advisers between 2016 and 2021. In total, she identified 1,392 proposals to improve the social or environmental practices of a company, 1,253 (90%) were put forward by shareholders.
On average the findings were no surprise to people who have been working in the ESG investing field for a long time. Asset owners (i.e. pension funds and endowments) were more concerned about ESG and voted more often in favour of corporate social responsibility resolutions than asset managers. Every survey about ESG investing that I have come across shows that asset owners (whether institutions or retail investors) care more about ESG investing than asset managers. And asset managers care more about ESG investing than sell-side analysts and advisers.
Furthermore, continental European investors care more about ESG investing than American investors with the UK being somewhere in the middle between continental Europe and the US. This is on the one hand a result of the higher adoption rate of ESG investing in Europe than in the United States, but also of the different legal frameworks that have resulted in legal requirements in some countries to take ESG consideration explicitly into account when making investment decisions.
However, what was a surprise (at least to me), how big the differences in voting behaviour are. The chart below shows the average voting behaviour of some prominent asset managers where a vote against an ESG proposal was counted as +1, an abstention as 0, and a vote in favour as -1. The further to the right a bar goes, the more likely an asset manager is to vote against ESG proposals at shareholder meetings. Note that the large Dutch and French asset management firms tend to vote very much in favour of ESG proposals while the American asset managers tend to vote against them (with the UK asset managers again somewhere in the middle).
Average voting behaviour on ESG proposals at company shareholder meetings
Source: Lafare (2022)
In defence of American asset managers, I have to say that my experience with their fund managers here in the UK is that they are just as tuned in and aware of ESG matters as their colleagues who work for European or UK firms. The determinant of ESG integration is mostly the fund manager and local regulations and customer needs. And that means that a fund manager who works for BlackRock in London will be engaging with company management on ESG matters just as intensively as a fund manager who works for BNP Paribas.
But typically, when it comes to voting at shareholder meetings, an asset manager submits one vote for all the shares held in a company across the organisation. The result is that fund managers who may want to vote in favour of ESG resolutions are simply not asked for their opinion or their opinion is not reflected in the vote of the firm.
Which brings me to a simple solution: Wouldn’t it be better if large asset managers let their fund managers vote on the shares they hold in their portfolios? It’s really easy to aggregate the votes per company and then submit them in bulk for the fraction of shares voting in favour or against a resolution. Also, fund managers typically know the company they invest in really well and it won’t take them a lot of work to form an opinion on how to vote on individual proposals.
The advantage would be that fund managers working for these companies can stand in front of their clients and show them how they have fulfilled their responsibilities as a shareholder and how they voted on certain issues. Instead, voting is currently outsourced to a specialist proxy voting team and done on behalf of the entire company. Thus, companies like BlackRock get constantly scolded for greenwashing here in Europe even though their European fund managers take the issues as seriously as anyone. It’s just that their American colleagues are “overruling” them.