The Engaged Investor: Asset managers under scrutiny
Louise Rouse of campaigning charity FairPensions takes a look at the public disclosure practices on voting and engagement undertaken by UK asset managers
Few people would deny that responsible investment, as demonstrated by institutional investors' voting and engagement activity, adds value for investors if undertaken diligently. This is why FairPensions warmly welcomes the publication of the UK Stewardship Code.
Public disclosure is imperative for demonstrating and exercising accountability. FairPensions' previous research has demonstrated a robust link between the quality of disclosures made on stewardship activity and the actual effort being made and value being added on voting and engagement. So, the first independent study of the public disclosure practices and formal responses to the Stewardship Code of 29 of the largest asset managers operating in the UK, is timely.
Five of the asset managers surveyed do not have a publicly available policy document explaining their approach to incorporating environmental, social and governance (ESG) issues into their investment activities. Of those who do, nine provide detail with respect to governance issues but only a general overview on how environmental and social issues are incorporated. However, the number of asset managers that make public a comprehensive policy has increased from three in 2008 to 10 in 2010.
Twenty-four managers publicly disclose at least some up-to-date information on their voting records at AGMs. However, the quality ranges from uninformative summary statistics (four managers) to a resolution-by-resolution record of all votes with explanations provided for votes against management, votes on shareholder proposals and contentious votes (F&C).
Some justified poor public disclosure on the grounds that it might compromise the effectiveness of their engagements. It would appear that this is not a universally shared concern - several managers with a policy of thorough disclosure on voting are also market leaders on company engagement.
One manager believes that, while permitting public disclosure by their clients, disclosing voting records themselves may, in certain cases, constitute a breach of client confidentiality. This opens the possibility of a lack of accountability to the ultimate beneficiaries if a pension fund client chooses not to disclose its voting record. Indeed, the National Association of Pension Funds' (NAPF) guidance on the UK Stewardship Code suggests that disclosure of voting is more a matter for fund managers than pension funds.
We believe that the Financial Reporting Council should provide for the market a model disclosure format and recommend its adoption by institutional investors. Just as we expect companies to disclose key financial data in a standardised manner, a common format for voting disclosure would significantly improve market efficiency and assist clients in manager selection.
While public disclosure on engagement activities has improved since 2008, 41% of the managers surveyed still do not publicly disclose any information regarding their engagement activities. Of the 17 that do, nine publish detailed explanations of a sample of engagements. The excuse often provided for non-disclosure on engagement activity is concern about undermining relationships with investee companies. However, we note the level of public disclosure made by managers such as Newton, Threadneedle and F&C without any apparent damage to relationships. In the case of two asset managers, details of engagement activity were set out in the manager's corporate social responsibility report rather than in documents dealing specifically with investment activity. We think this is less than ideal.
Since 2008 there has been an overall improvement in asset manager transparency. Ten managers have made improvements to the level of detail provided in their policy documents describing how they incorporate ESG issues into investment activities. A further three (Capital, Schroder and State Street) now have a policy setting out their approach where none was made available before. With respect to voting disclosures, 24% of managers have moved from providing summary statistics to disclosing more detailed voting reports (Aviva, Blackrock, Henderson, Hermes, JP Morgan, Standard Life and UBS). The number of asset managers publicly disclosing detailed explanations of a sample of engagements has recently increased to nine.
It is encouraging that a number of asset owners have issued statements of compliance with respect to the code; others have indicated that compliance will be a criterion in the selection of asset managers. However, our report identifies that asset managers issuing a statement of compliance will not provide sufficient assurance that they have adequately integrated ESG issues and active stewardship into their investment process.
We have set out a number of recommendations for asset owners:
• Issue a formal statement with respect to the code, as recommended by NAPF;
• Include compliance with the code as a criterion in the selection of asset mangers;
• Request information regarding an asset manager's management of conflicts of interest, including the specific circumstances in which a conflict of interest may arise within the asset manager's organisation given its business model and structure, and the specific administrative and managerial measures in place to manage these conflicts;
• Request examples of specific circumstances in which an asset manager has escalated its engagement activities in respect of each ESG issue.
Louise Rouse is director of investor engagement at FairPensions