Asset managers must up their game on engagement and diversity

The Point of No Returns 2023 report has highlighted some major gaps and inconsistencies across voting and engagement policies.

Biodiversity is an issue that is receiving very little attention. While 82 per cent of asset managers report voting policies on climate and 81 per cent on social issues, nearly two thirds (62 per cent) have no policy on biodiversity, said the reports’ authors.

No reason given

But even where there are policies, very few managers are explaining the motivations behind their actions. 

While the vast majority (88 per cent) of asset managers disclose votes publicly, almost half of those (42 per cent) offer no rationale for why they may choose to vote against shareholder resolutions.

Abhijay Sood, financial sector research manager at ShareAction, told Pensions Expert: “One of the very disappointing things is that even when asset managers publish rationales, you often find a line saying, ‘Not in shareholder interest’. 

“What if the shareholders wanted to make that judgement, there is no way of feeding that back?”

Only just over half (55 per cent) reported that they review the majority of proxy voting adviser recommendations from companies like ISS and Glass Lewis, but only three asset managers said they declared their voting intentions publicly before annual meetings. 

The survey’s investigation of engagement has thrown up some concerns about a worrying lack of consistency.

Asset managers will claim that engagement is a core part of their governance practices. However, that might depend on the asset class you are investing in. More than four in five (82 per cent) of asset managers’ engagement policies cover equities, while fewer than half that (40 per cent) cover all assets under management.

All carrot, no stick

Perhaps even more worrying is where engagement is falling on deaf ears. While 83 per cent of asset managers have a declared escalation process in their engagement policies, more than half have no consequences attached to them, nor do they reference specific triggers. Fewer than a third even publish a full list of companies they engage with.

It is encouraging, said Sood, that there are many more frameworks around stewardship and governance than the last survey in 2020. 

“There’s stuff that exists now that didn’t exist in 2020, but it’s the lowest of low hanging fruit,” said Sood. “If you don’t like what a company is doing, and you’re not prepared to vote against management, reduce holdings or divest entirely, then how can you have a credible negotiation if you’re not willing to walk away from the table?”

In these situations, having an engagement policy is “a complete waste of time”.  

Diversity and inclusion would appear to be an area managers could improve, as it is fully under their own control. Yet the report found that asset managers have a great deal of work left to do.

Even though two thirds of asset managers reported they had several policies or practices in place to improve diversity and inclusion within their business, fewer than two thirds of asset managers measure an indicator of workforce diversity to monitor their progress, and fewer than half reported any time-bound deadlines for achieving any targets set.

More measurement and less wishful thinking 

Paul Lee, head of stewardship and sustainable investment strategy at Redington, said the lack of transparency is not down to unwillingness but a lack of systems and basic investment in the infrastructure to enable managers to communicate whet they are doing. 

“Stewardship has to be something that you do across all asset classes. It’s not just an equities game,” said Lee. 

“Our analysis tends to show that most of that activity is focused on the companies that also have listed equity. So they might be engaging in relation to the credit bonds, but they’re only mostly looking at companies that are actually listed publicly, which leaves really big gaps.”

Redington’s findings on diversity corroborate ShareAction’s. Lee said the annual survey of managers flagged a number of “shocking results”. 

“The vast majority of managers said all teams were representative of the communities in which they operate. But actually only a tiny minority have anything like gender equality. 

“Either these managers are operating in communities that are 75 per cent male, or they’re not willing to be honest with themselves about the scale of the challenge they’re facing. 

“We can only really start to properly deliver if you’re measuring this stuff and understanding it. We cannot expect the corporate world to be measuring and reporting on it if investors themselves don’t capture the data about themselves.”

Adam Gregory, a senior investment consultant at Cartwright, said most trustees will be too concerned about the lack of published engagement lists.

“Pressurising from campaign groups, and more recently investors, has sparked change,” said Gregory. 

“The industry has made significant improvements compared to where we were a couple of decades ago. 

“Clearly more needs to be done, but I’d be surprised if we looked back in five years and found those numbers had not improved some more.”

Reasons to be cheerful – or at least optimistic

While major gaps — and even glaring omissions — are highlighted by the report, there is nothing being asked by ShareAction that cannot be done, said Sood. 

There was only one question out of 107 in the survey that none of the managers could answer, which will be addressed in a separate report, said Sood. 

“On every other question, someone got full marks, which means that some managers are doing everything we think is achievable. 

“So on the one hand, these things are feasible, and managers are capable of doing them for investors, but even the asset managers at the very top are missing about a fifth of those processes.” 

The Point of No Returns 2023 report surveyed 77 major asset managers with $77tn (£64tn) of assets under management, and ranked their performance in a league table. 

This is the second in a series of releases based on the survey responses.