The UK Asset Owner Stewardship Review has warned there is a misalignment and misunderstanding of the importance of stewardship between asset owners and asset managers – with the latter coming under the spotlight for their stewardship failings.
The review, brought together by the UK Asset Owner Roundtable, made up of leading asset owners and asset managers, offers five potential explanations for the misalignment.
The first reason is attributed to cultural/political misalignment. The participating asset owners are all UK based, while most participating asset managers are not, which may lead to a slight “cultural misalignment,” said the review.
The second reason is down to some misunderstanding as to the relevance of stewardship and voting, or the urgency of climate change as a key priority theme within stewardship.
The third reason is a misunderstanding of fiduciary duty itself. Therefore, following the prudent man rule, asset managers should target a high, or even “optimized return per unit of risk ratio,” commented the review.
Then there is a “conceptual disagreement” as to the most effective combination of stewardship processes. From the voting patterns revealed in the review, it is evident that some asset managers appear to see voting and engagement as mutually exclusive while others view it as much more complementary.
Finally, is to do with stewardship governance – as asset managers and/or financial firms owning them tend to have many “more commercial relationships with the issuers” than the asset owners whom the asset managers serve, said the review.
This means there are big challenges for the Asset Owner Roundtable to address going forward on the all-important issue of stewardship.
Long-term interests
The aim of review has been defined as the need to understand how “asset owners’ long-term interests have been served by their managers” when exercising their stewardship and proxy voting at major oil and gas companies within the global universe of the Transition Pathway Initiative (TPI).
Specifically, UK asset owners have been concerned that despite unequivocal warnings from the United Nations and the Intergovernmental Panel on Climate Change about the risks of delayed action on climate change, short-term interests of asset managers may be trumping long-term interests of pension funds.
To address these concerns the review explored two crucial areas.
First, it studied the actual votes cast by asset managers between 2015 and 2023 for TPI universe oil and gas companies and correlated them with the equal weighted average of asset owner voting as contributed by the 10 participating asset owners.
Second, it reviewed the voting rationales provided by asset owners, with asset managers misaligned with asset owners.
Big insight
Here the review revealed three trends. One, only selected asset managers “publicly reason” like asset owners.
Two, some asset managers somehow see voting and ESG engagement as mutually exclusive and appear to fear the loss of access to management if they voted against management.
And third, among asset managers, there appears to be a substantial divergence as to their interpretation of shareholders’ and even society’s interests.
The study also reviewed the ESG engagement success across all relevant issuers, which revealed three different engagement processes.
The first is so called “textbook style,” based on persistent, long duration, large-scale engagement with substantial progress.
Second is a “quick fix style,” with engagements characterised by less consistency, shorter duration, and more mixed progress.
Third are the engagements defined as “jumping the bandwagon style,” as they appear to target only firms that already have been improved.
Next steps
To address these points the Asset Owner Roundtable has set out three areas to address.
The first is to explore the potential for extending this research to cover US asset owners.
Two, having one-to-one meetings between the UK Asset Owner Roundtable’s members and their investment managers to discuss those manager voting decisions at global oil-and-gas company AGMs.
And three, set out stewardship expectations for asset managers that will be developed by the UK Asset Owner Roundtable.
Leanne Clements, head of responsible investment for The People’s Partnership, provider of The People’s Pension, and member of the roundtable, said of the findings: “We have reached an impasse with respect to net-zero stewardship and we are running out of time.”
She therefore added: “Urgent action is needed from the entire stewardship chain to address the misalignment issue identified in this research. A complete dismantling of failed status quo approaches to stewardship is needed by the fund management industry, with voting escalation not seen as a last resort approach used on an exceptions basis, but rather a powerful signal to companies of what investors expect of them.”
She also warned of the consequences of failing to address these issues. “A continued lack of industry action will seriously undermine the financial sector’s ability to deliver not only its own net zero commitments, but more importantly, better outcomes for savers,” Clements said.
Faith Ward, chief responsible investment officer at Brunel Pension Partnership, and also a roundtable member, added: “I am optimistic about the practical steps discussed, and the willingness of participants in the process to address the perceived gap verified by this report.”
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