Many companies believe stewardship and responsible investment teams should leave voting decisions to fund managers, according to findings in a report from the UK’s Financial Reporting Council.
Along with consultancy firm Morrow Sodali and researchers from Durham University, the FRC published an 85-page paper on the influence of proxy advisors and ESG rating agencies on investor voting last week.
The regulator commissioned the research in August 2022 to help it understand the influence of proxy recommendations and ESG scores, the prevalence of ‘tick box’ behaviour in shareholder voting, and the response of the UK’s largest listed companies.
As part of the research, the authors surveyed stakeholders including 48 companies and 32 investors. It also interviewed 13 companies and 14 investors and held roundtables with 55 participants.
“Many company respondents believed that where voting decisions were taken by the investor’s stewardship or responsible investment teams, they often lacked the necessary understanding of the company or its business model and would therefore be more inclined to rely on the proxy advisor,” the report noted, adding: “It was implied that the same investor’s fund managers might reach a different conclusion.”
The comments are just one area covered by the report, which comes as the FRC prepares to review the UK Steward Code and other regulatory tools later this year, to establish whether they sufficiently promote effective stewardship, or whether more regulation is needed.
Pension fund stewardship updates
In line with the current Stewardship Code, a number of key UK asset owners and managers have published annual sustainability and engagement reports in recent weeks.
On Friday, the Church of England published its third stewardship report, flagging its commitment to tackling issues around mining safety, human rights, executive pay and climate change.
In its recent annual update, pension fund Railpen highlighted its efforts to discourage firms from adopting dual-class share structures that leave investors without voting rights.
The FCA is currently considering whether to loosen listing rules in the UK to “be more permissive on dual-class share structures” in order to appeal to early-stage companies.
In response, UK Railpen’s senior investment manager Caroline Escott said its annual stewardship report was “published at a time when investor voting rights, and broader shareholder protections, are under threat in a debate that underplays the importance of high-quality investor stewardship to successful financial outcomes”.
It also pointed to its involvement in an initiative to get more workers on boards and its burgeoning work on biodiversity.
In its report, Brunel Pension Partnership noted its ‘climate stock-take’, which its head of responsible investment, Faith Ward, said enabled the pension pool “to really interrogate whether our actions are having the outcomes we want them to”.
Beyond climate, she added that she was particularly proud of supporting a 2022 shareholder resolution asking supermarket giant Sainsburys to pay all of its workers the living wage – a proposal that the firm didn’t accept, but still resulted in “pay increases for 19,000 Sainsbury’s employees”, according to Ward.
Asset manager stewardship updates
Fidelity International’s recent sustainability report highlighted the launches of a deforestation framework to address portfolio risks associated with commodity-driven deforestation by 2025, and a thermal coal engagement programme in 2022. The latter has targeted European companies so far, but Fidelity will roll it out to Asia Pacific over coming months. It will also step up its work on the just transition, it said.
Veteran green impact manager WHEB published its engagement report this month, in which it said its investment team had nearly doubled the number of engagements it held with portfolio companies in 2022, to more than 200. It focused on remuneration, citing data showing the pay gap between chief executive officer and median worker in the US rose from 299x in 2021 to 324x in 2022. Other themes were biodiversity, hazardous chemicals and gender diversity.
Expansion into other asset classes
While the focus of the stewardship reports, and the FRC’s research into voting and engagement practices, remains on listed equities for now, the past month has also seen a major push to expand into other asset classes.
The world’s biggest engagement network, Climate Action 100+, recently unveiled its plans for the next seven years, saying that it would widen its scope beyond public shareholdings. Some hope this will help it deal with polluting state-owned companies that issue bonds, but not equity.
CA100+’s announcement was swiftly followed by some ‘net zero bondholder guidance’ from the Institutional Investor Group on Climate Change (IIGCC), published last week.
Along with pointers for how financial institutions can engage through their fixed income portfolios, the report offers a number of case studies from investors including Aviva and Federated Hermes.
In its stewardship report, Railpen said its ‘sustainable ownership’ team had worked with colleagues in infrastructure and private markets in 2022, in a bid to “identify potential sustainability risks within illiquid assets, as well as ensuring ownership rights are fully utilised”.