How fund managers use their power to drive ESG change

Fund managers give examples of how they try to use their shareholder influence as a force for good.

Fund managers are blocking progress on environmental and social issues by not flexing their voting muscles to force listed companies to do better, a recent report argued.

The damning research paper from ShareAction, Voting Matters 2021, published in December, looked at 65 asset managers and how they voted on environmental, social and governance (ESG) resolutions last year.

It revealed that just 30 out of 146 ESG resolutions received majority support in the latest proxy season.

Largest fund firms voted conservatively

The six largest asset managers - BlackRock, Vanguard, Fidelity Investments, State Street Global Advisors, Capital Group and JPMorgan Asset Management - all voted more conservatively than proxy advisers recommended, supporting fewer than 40% of resolutions. The largest groups have a lot of sway: the top three by size are responsible for 25% of all shareholder votes cast in S&P 500 companies. This means, when they vote conservatively, they can have a disproportionate impact on the outcome.

Some 18 resolutions would have had majority support and likely been passed if one or more of the three largest asset managers has voted in favour. “Given the size of assets and degree of influence these managers have over corporate behaviour, their failure to adequately use their voting rights to tackle environmental and social issues should raise serious questions for their clients,” ShareAction said.

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Scant support for climate resolutions

ShareAction found that even those fund groups signed up to climate and net-zero carbon agreements voted against one-third of climate resolutions in the companies they held. Disclosure of diversity information was one of the few social resolutions to garner votes in favour. There was also little support for resolutions around working conditions, and human rights: 11 asset managers voted against human rights-related shareholder proposals at companies supplying weapons to states engaged in conflict with a record of alleged human rights violations. 

The report also found that many asset managers are not even exercising their voting rights: seven groups voted on fewer than 60% of resolutions. “Not voting sends a signal to these companies that their behaviour on environmental and social issues is not of interest to their shareholders,” ShareAction said.

How ESG fund managers use their votes

Why aren’t some large asset managers putting their money where their mouth is when it comes to proxy voting? BMO Global Asset Management (GAM)’s head of governance Kalina Lazarova notes that the relationship between investors and companies on ESG issues has historically been “somewhat fraught”, with companies seeing shareholder proposals as quite adversarial.

She says: “Perhaps for that reason, large institutions which have the ability to engage with companies have not opted for explicit voting action on all proposals, partly because they have the ability to discuss the issues behind the scenes.” Lazarova adds BMO GAM’s stance is to demonstrate its position through voting, as well as other engagement activities.

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While it has not yet published its annual engagement report for 2021, Lazarova did reveal that the firm voted against at least one management proposal in about two-thirds of meetings. Overall, it voted against company management about 20% of the time in 2021.

In 2020, it voted against management on 23% of corporate governance resolutions, including 52% against on executive pay. It also supported 65% of all shareholder resolutions on climate change.

Some of BMO GAM’s vote examples from 2020 included:

Barclays: supporting a shareholder resolution to phase out Barclays (LSE:BARC)’ financing of the fossil fuel industry, supported by 24% of shareholders.

Wizz Air: voting against the airline’s remuneration report, voted down by just over half of shareholders. The issue was a discretionary bonus given to the CEO during a year when Wizz Air (LSE:WIZZ) announced 1,000 redundancies and took a £300 million government Covid-19 loan.

Exxon Mobil: voting against all incumbent board directors for Exxon Mobil (NYSE:XOM)because they had been resisting engagement and lagging behind peers on climate change strategy.

Liontrust’s sustainable investment team has published its voting record up to the third quarter of 2021. It challenged management teams in some of the following ways last year:

3i: voting against re-election of a 3i (LSE:III) board member because there were no ethnic minority directors on the board.

Halma: voting against a proposal to significantly increase maximum pay for executive directors. Halma (LSE:HLMA) wanted to increase the CEO’s bonus opportunity from 150% to 200% of salary, and long-term incentive plan from 200% to 300% of salary.

GB Group: voting against re-electing the same audit firm that GB Group (LSE:GBG) had had for more than a decade. Liontrust said auditors must be rotated to reduce risk and safeguard against improper audits.

Another big responsible investing asset manager is Royal London Asset Management, which reveals that in 2020 it voted against management on issues such as:

Alphabet: voting in favour of eight out of 10 shareholder proposals calling for better disclosure on things such as whistleblowing policies, human rights oversight, and transparency on takedown requests on Alphabet (NASDAQ:GOOG)'s software platforms. It also had concerns about the group’s use of one-off awards to remunerate directors, calling them “inappropriate”.

Amazon: supporting nine out of 12 Amazon (NASDAQ:AMZN) shareholder resolutions for increased disclosure on a range of issues such as reporting on food waste, human rights impacts of facial recognition technology, hate speech, sale of offensive products, and gender and racial pay equity.

Adidas: voting against management as they had failed to address diversity and inclusion issues in the adidas (XETRA:ADS) workforce, and in racially insensitive advertising.

Engaging behind the scenes

Voting is important because it is a matter of public record – it makes a strong statement in support or opposition to a listed company’s behaviour that anyone can see. Some fund groups argue, though, that how they speak to companies behind closed doors is just as important a driver for change as the visible voting record. Of course, not all fund groups will have the clout to secure face-to-face meetings with the CEOs of the world’s largest companies, but proactive ESG fund managers will be pushing for meetings wherever they can.

“Engaging on ESG issues gives us greater insight into companies and their businesses,” says Harriet Parker, investment manager on Liontrust’s sustainable investment team. 

“We spend a lot of time talking to companies on ESG issues and are transparent about this activity. We record all engagement with companies and monitor where we have been successful, where progress has been slower and where unsuccessful.”

She points to the group’s 1.5 degree challenge, an initiative to push all companies Liontrust holds in its Sustainable Future funds to take more action on emissions to lower the global temperature.

It has contacted 71 companies and met with 57 to discuss decarbonisation targets, and plans to also use voting and ultimately divesting over time to pressure companies to cut emissions. The group also tells clients exactly what this engagement has really achieved. In a November 2021 update, the group said a quarter of firms it spoke to had agreed decarbonisation targets in line with 1.5 degrees, and another 9% are aiming for a two degrees reduction.

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Liontrust’s team are also “very active owners” who take part in annual voting for all the companies across their portfolios, Parker adds. “Key to our investment process is exercising our rights as shareholders to influence corporate behaviour for the better, improve the companies we own and promote sustainable responsible finance more broadly.”

When to abstain

Lazarova believes that both public voting and private engagement are important tools for responsible investors trying to make companies do better. “We are supportive of the companies we invest in, but we wish to be critically supportive. Through our vote, we express areas where we identify points where companies don’t fully meet our expectations.”

Her team will always vote, unless there is ‘share blocking’ in the market (where a share can’t be traded until after a shareholder meeting ends), to preserve liquidity for clients. They do abstain “sparingly” in instances where they support a proposal but think it unimplementable, or to “escalate or temporarily de-escalate a particular concern”.

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“It’s not about sitting on the fence,” she says. “We see voting as a really key tool in our stewardship toolkit and through this will seek to promote a market-wide agenda of improvement in ESG practices of companies. We have found that using the vote is a very important lever to support these aspirations.”

Companies held in ESG funds will already have passed some degree of screening to be included, so the chances are they are already demonstrating decent ESG business practices. This means that, while sustainable fund managers might not need to publicly lock horns with company execs in the boardroom, they will likely be putting pressure on company management in more subtle ways to drive positive change.