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Managers on Wrong Stewardship Wavelength

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Stockholm (NordSIP) – The stewardship and voting duties inherent in large diversified institutional equity portfolios are resource and time-consuming for asset owners.  Most investors therefore tend to outsource many of these tasks to their external asset managers.  However, doubts have been raised over the effectiveness of this set-up, with some asset owners suspecting their managers of ignoring their clients’ sustainability priorities.  Earlier this year, the UK Asset Owner Roundtable commissioned a stewardship review to be led by Professor Andreas Hoepner of University College Dublin.  The results were published on 21 November 2023 and revealed evidence of misalignment of interests between the two parties.

The asset owners within the roundtable include large UK local authority pension pools the Border to Coast Pensions Partnership, the Brunel Pension Partnership, and LGPS Central, as well as the Central Church of England Pensions Board, the Local Pension Partnership Investments (LPPI), Merseyside, NEST, Pension Protection Fund, Scottish Widows, and Universities Superannuation Scheme.  The focus of the study was the external asset managers’ stewardship and proxy voting activities with respect to major oil and gas companies present in the global universe of the Transition Pathway Initiative (TPI).  Hoepner and his team examined the correlation of the managers’ voting records from 2015 to 2023 with an equal weighted average of the asset owners’ instructions.  This revealed significant misalignments, which were more pronounced in recent years and more common in the case of shareholder resolutions for American companies.

Managers out of touch with their clients

The next step involved delving further into the managers’ voting rationales to better understand the observed misalignment with asset owners.  Hoepner found that most managers operate with a very distinct mindset from that of their asset owner clients.  A common concern among the asset managers was a perceived risk of losing access to management were they to vote against the company.  In this case they appear to prioritise engagement over voting.  The study also pointed to fundamentally different “house” views on shareholder or wider society’s interests, with short-term commercial priorities going against science-based sustainability targets.  Hoepner also evaluated the effectiveness of the managers’ engagement processes, which varied greatly in terms of quality and forethought.

The UK Asset Owner Roundtable intends to use the results of this stewardship review to inform a constructive dialogue with the external managers.  One of the study’s conclusions is that there is too often a sharp difference in sustainability priorities between European asset owners and US managers.  This can be compounded when US managers therefore dedicate insufficient or less-qualified resources to the stewardship process.  The study also suggests a need for a reclarification of the concept of fiduciary duty within a transitioning global economy.  The asset owners’ view that climate change is a core risk consideration is not universally shared by the managers.  Other factors to be explored in dialogue with the managers include potential conflicts of interest relating to the managers’ banking arms muddying the waters in terms of effective engagement or shareholder activism.

The commissioning of this fact-based study has provided these large institutional asset owners with greater leverage over their appointed managers and appears to have generated a constructive dialogue on improving the situation.  The next steps will include the drafting of clearer stewardship expectations for managers and a potential second study focused on US asset owners.

Image courtesy of G.C. from Pixabay
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