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Investors demand greater ESG voting rights

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

Asset managers’ investor-clients are demanding – and receiving – an increasing say on companies’ environmental, social and governance matters.

More than half the world’s largest asset managers are considering introducing “client-led voting”, according to a report from the Occupational Pensions Stewardship Council, whose members hold more than £500bn in UK pension assets. The largest asset managers hold significant sway over votes at annual and other company meetings.

Client-led voting gives funds’ investors a say in company matters, such as mergers and acquisitions, director elections and stewardship. Traditionally, voting has been the preserve of asset managers, who sometimes delegate to proxy advisers.

For the past year, BlackRock, the world’s largest asset manager, has invited pension funds, insurance companies and other institutional investors in its funds to vote. Clients have so far voted on $530bn worth of shares. BlackRock plans to extend the right to all clients.

In the US, regulation prevents individuals from voting based on their shares in their 401k workplace retirement plans, mutual funds or exchange-traded funds. BlackRock is piloting its expansion of voting rights in the UK with technology support from Proxymity, a fintech company.

DWS Group, the European asset manager with €833bn assets under management, last year gave pension funds the right to vote on questions of stewardship in pooled funds. Schwab Asset Management has also announced plans to survey fund shareholders on topics from ESG to executive pay.

Vanguard said in its latest investment stewardship report that it was considering ways to increase proxy voting “to give investors a greater voice”. It is to pilot a number of proxy voting policy options from early in the new year.

With more investors gaining access to proxy voting and voting preferences, boards should keep track of developments, experts say.

“There are a lot of shares voted in large blocks by asset managers, so you will eventually see more fragmentation on how those votes are cast for shareholder preferences,” says Lindsey Stewart, director of investment stewardship research at Morningstar UK.

Boards will increase their understanding of how ordinary investors want directors to run the company, says Jill Fisch, co-director of the Institute for Law and Economics at the University of Pennsylvania.

“Board directors [currently] get the shareholder perspective filtered through the asset managers and governance teams at the mutual fund companies,” Fisch says.

But asset managers could wield less influence over companies if they move from controlling a higher percentage of a vote to controlling less, says Fisch.

Current voting patterns could change if asset managers hand over responsibility for making ESG decisions.

No major asset manager’s proxy voting policy explicitly seeks to hold companies accountable for limiting warming to 1.5C, according to a report by Majority Action, a corporate governance non-profit.

Large asset managers “consistently” vote in line with management at companies where they either administer retirement plans or are paid for providing other services, according to a 2021 report from As You Sow, a corporate governance non-profit.

BlackRock gives clients participating in its “voting choice” programme the option to vote for their own preferences; outsource their vote to a third-party proxy adviser such as ISS, or continue to allow BlackRock to vote on their behalf. They mix these options if they wish.

The most popular option is a third-party voting policy, according to the company.

Schwab polls investors on a dozen questions about company policies, corporate governance, environmental and social issues, executive compensation, board compositions and other areas, Omar Aguilar, the chief executive, says..

Schwab does not have plans to transfer voting power to clients, Aguilar adds. “Understanding what shareholders think is the first step.”

This article is based on a story written by Lindsay Frost for Agenda.

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