An industry body representing trustees says market failures are preventing it from meeting the pensions and financial inclusion minister’s call to sack managers who refuse to implement voting policies.
In a robust conference speech last week Guy Opperman told asset owners they have the power to see fund management designed according to their specifications, and that lack of demand is hindering change.
But the Association of Member Nominated Trustees said asset managers’ legal ownership of assets in pooled funds is still frustrating their efforts to take action on environmental, social and governance issues.
Earlier this year, a survey by the AMNT found that out of 40 investment houses offering pooled funds, no manager agreed to vote shares in line with the organisation’s Red Line Voting policies.
You as trustees are far from limited in what you could do – put simply you could fire them. You have a great deal of power
Guy Opperman MP
“The assumption people might have had is that the problem with voting in pooled funds is some issue that’s restricted to small schemes, but that’s simply not true,” explained Janice Turner, founding co-chair of the AMNT.
The Treasury select committee has recently thrown its weight behind the body, asking the Financial Conduct Authority how it will address this “market failure”.
Ms Turner said this intransigence would be less important if existing products met trustees’ expectations, but pointed to the number of excessive pay packages voted through at UK companies as a sign of greenwashing, even on issues close to home.
She hoped that the Financial Reporting Council’s new stewardship code – which will ask managers to consider clients’ wishes – is implemented in its full spirit. If not, legislation may be required to return voting rights to asset owners.
“We would obviously wish that the issue could be resolved without legislation,” Ms Turner said, but added that there would be no other option “if the fund managers continue to refuse to respond to the new requirements of asset owners”.
Opperman stands firm on scheme responsibility
New rules introduced in October require trustees to state their approach to ESG and climate change specifically in their statements of investment principles. Mr Opperman ranked the requirements among the top three achievements of the Conservative government, and said “the direction of travel, whoever is in government, is clear”.
He acknowledged findings that asset managers often refuse to implement the voting wishes of their clients on shares, but said that ultimate responsibility lies with schemes.
“Remind me, who hired the asset manager?” he asked. “You as trustees are far from limited in what you could do – put simply you could fire them. You have a great deal of power.
“If trustees think they cannot do anything, where do they think the power lies, and also: what are they doing in their job?”
Mr Opperman said he was “shocked” by the findings of the AMNT report, but that supply would ultimately meet demand if fiduciaries take a strong enough stance. He pointed to the revised stewardship code as a key pillar of support for trustees setting their own engagement strategy.
“There is a market gap because you’re not seeking to buy it,” he said.
“The difficulty is this: if you say as a trustee to your asset manager ‘I wish our fund to be invested in this particular way’, then the asset manager will go and create that fund and, to be fair, some are doing that. You may say ‘not many’, but to me this is a massive opportunity.”
Mr Opperman said the 40 large schemes he wrote to earlier this year could have an “amazing” impact if they simply delivered an ultimatum to managers.
“You are the drivers of capitalism, no doubt, because let’s be blunt, you have the most money,” he said.
Law Commission investigates intermediated securities
Help for trustees may be on the horizon in the form of a legal review.
With intermediated securities like those held in pooled funds, asset managers rather than asset owners are usually named on share certificates and other documents.
This limits schemes’ legal right to engage with companies, but a Law Commission consultation closing this week will investigate the issues further.
“It will provide an explanation for the current problems and issues that are arising,” said Stephen Lewis, commercial and common law commissioner.
ESG gauntlet laid down as member demand grows
Asset manager Schroders says trustees do not do enough to communicate their views on sustainability to their managers, as environmental, social and governance issues rise up the institutional and consumer agenda.
Although the commissioners “haven’t yet been asked to make formal law reform recommendations”, any insurmountable problems could still be overcome, he added.
In the interim, however, some managers have backed Mr Opperman’s ‘comply or fire’ approach.
“Your voting is your asset, you should be able to use your vote how you like,” said Ben Yeoh, senior portfolio manager at RBC Asset Management. He said engagement should ideally be a collaboration between manager and client.
“Good investors, wherever they are in the chain, active or passive, should be using this as a tool to add value,” Mr Yeoh said.
