Maria Nazarova-Doyle, who heads pension and responsible investments at Scottish Widows, says there is no legal impediment to asset owners directing votes. (Photo courtesy of Scottish Widows)
- After years of resistance to the implementation of British pension schemes’ voting wishes, a government-backed report aims to address the issue.
- Asset owners are urged either to establish a voting policy or seek more transparency of their fund managers’.
- Better stewardship is needed, particularly in light of issues such as the growing climate crisis, say industry participants.
“Today I might be losing a few ‘friends’,” quipped Maria Nazarova-Doyle, head of pension investments and responsible investment at British life insurance and pensions company Scottish Widows.
She was speaking in a LinkedIn post about last week’s publication of hard-hitting recommendations to government, regulators and industry on pension scheme voting.
The UK government had set up the Taskforce on Pension Scheme Voting Implementation in December 2020, on which Nazarova-Doyle sits, after years of pushback from asset managers to implementing the voting preferences of clients, she says.
Capital Monitor understands such thinking persists in some quarters, with individuals initially refusing to engage with the taskforce. This is despite the fact that the new proposals are less prescriptive than previous ones under discussion.
“There was certainly resistance [to the recommendations],” agrees a UK-based pension trustee speaking on condition of anonymity. “And that can be sensed in some of the tone of the report. I suspect it subsided a bit as the wise have realised the direction of travel.”
“Everyone needs to do better”
But it is not only asset managers that need to step up on corporate voting, Nazarova-Doyle suggests: “If you read the report, we are not complimentary to any actors in the market, as everyone needs to do better.”
Many fund houses seem to offer very poor client service on voting as well as other areas, the document says. It also bemoans the fact that relatively few UK asset owners actually have formal voting policies (31%).
There was certainly resistance [to the recommendations]. I suspect it subsided a bit as the wise have realised the direction of travel. A UK-based pension fund trustee
Moreover, the taskforce sees investment consultants as compromised by conflict of interest. “Consultants are not always supportive of trustees wishing to be more robust on voting issues,” it says, suggesting they fear alienating asset manager clients.
Savers ultimately bear the risk of their pension plans’ investments, says the report, and it is “naive” to think their views can be ignored. If retirement schemes do not have a voting policy, the taskforce recommends they should demand that their fund managers disclose theirs more fully. It also proposes that managers of pooled funds offer investors the opportunity to set an “expression of wishes” on their voting preferences.
If asset managers’ take-up of its recommendations is slow, the taskforce says, the issue should be referred to the UK Law Commission and legislation tabled to force them to act.
Faith Ward, chief responsible investment officer at Brunel Pension Partnership, a Bristol-based local authority retirement fund pool with some £35bn ($48bn) under management, is fully behind the proposals. “This thorough and thoughtful report is the culmination of deep research into voting practices,” she says. “It shows very clearly that we cannot continue as we were – radical change is needed.”
Not least in light of the climate crisis. Nazarova-Doyle points to the urgency of hitting net-zero portfolio emission targets and the growing social and sustainability challenge. These are things “that pension funds have the power to change, yet they’re not really engaged”, she notes.
Rising shareholder engagement
After all, even small hedge funds can drive change at huge corporations through such action, as US-based Engine No. 1 showed. The company was behind the first-of-its kind shareholder resolution in June that got three directors voted onto the board of Exxon Mobil with a view to pushing the oil major to reduce its carbon emissions.
It largely succeeded because it garnered support from three of the biggest fund houses – BlackRock, Vanguard and State Street Global Advisors – which own around 21% of Exxon Mobil’s voting stock. Other high-profile supporters of the Engine No. 1 proposal were California’s retirement schemes for public employees and teachers, and New York City’s pension funds.
If asset managers’ take-up of its recommendations is slow, the issue should be referred to the UK Law Commission and legislation tabled to force them to act. Taskforce on Pension Scheme Voting Implementation
Michael O’Leary, managing director at Engine No. 1, said the world is entering an “era of shareholder engagement” at a virtual forum this month hosted by Capital Monitor and the New Statesman, entitled Making Sense of Net Zero.
There has been a surge in support for climate-related shareholder resolutions globally this year, with the likes of fund houses BlackRock and Vanguard stepping up on this front. The number of proposals that had passed as of mid-August had already surpassed that for the whole of 2020, according to Georgeson, a provider of shareholder engagement and governance consulting services. However, analysis by Capital Monitor shows there is little data proving a correlation between shareholder resolutions and emissions reduction.
Still, there is progress being made on social issues. First-of-their kind proposals in respect of racial justice in the US this year attracted decent support, which would have been unimaginable five to ten years ago, O’Leary said.
“Once shareholders wake up that there are these issues being put to vote that have deep implications, not just for their own value but for their long-term economic interests, the genie’s out of the bottle,” O’Leary added. “I wouldn’t be surprised to see more shareholder proposals going forward.”
Barriers to stewardship
But the kind of institutional support that Engine No. 1 received often seems to be falling short.
Regulatory changes in 2018 require UK defined-contribution pension schemes to include a stewardship policy in their statement of investment principles from October 2020. This will be undermined if asset managers ignore their voting wishes says Fergus Moffatt, head of UK policy at ShareAction, a non-government organisation that promotes responsible investment.
Research conducted by the organisation last year and published in December 2020 found that 18 out of the 60 asset managers surveyed voted on fewer than half of the resolutions they could have voted on. And six – including BlackRock, Capital Group and Vanguard – voted on fewer than 20% of resolutions (see also table below).
This is “incredible”, Moffatt said, given that the financial sector should be playing a key role in tackling issues such as the climate crisis and biodiversity loss.
Indeed, the taskforce report seems to reflect the asset managers’ reluctance to act on their clients’ voting preferences. A poll it carried out found that 62% of asset owners said fund managers should be required to offer them the chance to express their wishes on voting, while 70% of asset managers rejected the idea.
Yet the taskforce found that there were no legal barriers to the implementation of such a requirement, says Nazarova-Doyle. “There is this widely held urban myth that legally you can’t actually direct votes or have an expression of wish. That quickly fell apart when we started investigating it.”
Indeed, some fund managers are already offering the service “on the quiet for some clients who managed to negotiate it”, she adds.
Optimism for pension voting change
Proponents of the proposals feel there is a good chance that the report will effect pension voting change. For one thing, UK pensions minister Guy Opperman – who is now due to respond to the recommendations – has a strong ambition to drive the taskforce’s agenda, says Nazarova-Doyle.
Meanwhile, the taskforce will engage with regulators cited in the report, such as the Department for Work and Pensions (DWP) and the Financial Conduct Authority (FCA), she adds. There are concerns that asset management resistance will move towards lobbying government and these regulators, says an activist who asked not to be named. “I suspect any lobbying of DWP will be counterproductive, and [perhaps] even stiffen Opperman’s desire to make progress,” he says.
Moreover, the FCA, which regulates fund managers, in April appointed Sacha Sadan, former director of investment stewardship at Legal & General Investment Management (LGIM), to a newly established role as director of ESG. LGIM – the largest British fund house by assets – voted on more than 95% of ESG-related resolutions last year, according to ShareAction.
Certainly James Alexander, chief executive of the UK Sustainable Investment and Finance Association (UKSIF), feels asset managers will be more receptive to the recommendations this time around. Simon Howard, former CEO of UKSIF, chaired the taskforce, set up in December 2020.
The former iteration of the taskforce’s “expression of wishes” idea – dubbed “red line voting” – was highly prescriptive, Alexander says, while the new approach is more voluntary. “That was one of the things that really caused concern. [The initial proposal] was literally very binary and didn’t leave any space for nuance. It was a matter of compulsion that a manager had to vote in line with trustees.”
Ultimately, the UK is considered a world leader in stewardship, Nazarova-Doyle says. “It’s one of our exports. It’s up to us to do it really well and set the bar high for the rest of the world.”
That will be easier for Britain's asset owners to do if their fund managers provide more support on their clients' voting wishes.
