UK - A significant proportion of equity holdings managed within passive funds is not subject to high levels of environmental, social and governance (ESG) risk management, suggests an audit carried out by RImetrics.
The study, delivered by a firm specialising in ESG assessment and analysis and commissioned by the Local Authority Pension Fund Forum (LAPFF), also found investment totalling less than 4/100 of one basis point overall is held in responsible investment (RI).
RImetrics based its assessment on the ESG competencies of three global passive asset managers: Legal & General, State Street and UBS. Barclays Global Investors declined to participate.
The three managers - responsible collectively for £700bn (€814bn) of passive equity funds, held in 3,000 companies worldwide - were evaluated and rated across five key RI themes of strategic orientation, engagement, research, proxy voting and transparency.
The audit found managers vote proxies, but do not do so consistently across the world, although proxies were consistently voted in the UK and US.
As a result of the lack of proxy voting in some regions, business activities related to around £130bn-worth of assets are not regularly voted on.
Managers engage with companies to a certain extent, but again, this is not consistent across the world, suggested the audit, and managers tend to be most active in engagement terms either where their RI staff are based, or where they hold most of their assets.
Small cap stocks are rarely engaged in, and holdings in emerging markets are typically never reviewed in voting terms, despite the firms having potentially higher levels of ESG risk.
RImetrics estimated that £350bn - or half - of assets are rarely, if ever, engaged with in ESG terms.
The study also found resources on the subject of voting and ESG were limited at the three firms, as there were only 11 individuals responsible for implementing ESG policies for these passive equity funds, although additional resources are provided, in some cases, by mainstream active management teams, while managers make use of voting service providers.
The report claimed asset managers were inevitably forced to be selective in their approach to ESG, particularly to engagement. RImetrics found firms expressed a willingness to engage in dialogue on ESG, but all of them said they had not, as yet, seen any real client pressure or demand to increase capabilities or resources.
Ian Greenwood, chairman, LAPFF, said: "I am surprised that the voting figures are as low as they are. If the credit crunch has shown us anything, it's that companies should have a much greater awareness of governance - if that had been the case, I do not think things would have been as bad."
He continued: "Pension funds should be properly scrutinising the financial arrangements of companies where they have shareholdings, and putting down motions and voting at AGMs, or ensuring their asset manager does it for them."
The LAPFF represents 49 UK-based local authority pension funds.
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