Janice Turner, co-chair of the Association of Member Nominated Trustees (AMNT), argues that asset owners should take charge of voting policy
It is a little-known fact that nearly half the assets invested in the UK are in pooled investments managed by fund managers.
This equates to a staggering £3.8trn and includes a substantial amount of pension fund assets. The pension funds, not the fund managers, own these assets. So, you might think that trustees of the pension funds would have some say on how their assets are used to influence the companies in which they are invested.
Particularly on crucial issues such as ESG. In the vast majority of cases you would be wrong. There is now a clash between the asset owners and the fund managers over who should direct the voting policy of the investments held in pooled funds. This is an untenable situation that requires immediate attention especially given the new, greater regulatory obligations placed upon trustees.
As background, the AMNT introduced a new approach to responsible investing in 2015 called Red Line Voting. This enables trustees to play a proper stewardship role with regard to the companies in which they invest – including pension schemes investing via pooled funds – to meet their fiduciary duties. It does this by allowing pension schemes to set environmental, social and governance (ESG) voting policies at “best practice” level¹. This is in line with recent guidance from The Pensions Regulator and the Law Commission.
Prior to the launch of Red Line Voting, we sought advice from fund managers and organisations right across the financial services industry and the voting chain.
Additionally, we received advice on climate change voting policy from the Carbon Disclosure Project. I was therefore shocked when reports came in from trustees that their fund managers were refusing to accept their voting policy, even on a comply or explain basis.
To move the situation forward, AMNT commissioned a report from Professor Iain Clacher² to evaluate the obstacles to allowing trustees’ voting policies to be implemented by fund managers in pooled fund arrangements.
The report came to three main conclusions:
First, the barriers presented to split voting in pooled funds are not insurmountable, especially as some fund managers have already been doing this for some clients. Put simply, asset owners’ policies could be implemented by fund managers if there was the will to do so.
Second, whilst a lack of will represents a key driver for inertia in addressing the issue, long-term under-investment in the voting system means that it is no longer fit for purpose. It needs urgent reform. A simplification of the voting chain and investment in technology to enable the effective stewardship of pension fund investments for the long run is required.
Third, whilst asset owners themselves need to be more proactive in their stewardship approach, they cannot do so without the support of their investment consultants.
So far, this has been sadly lacking. Investment consultants should hold fund managers to account for their unwillingness to accept client voting policies. This could potentially include downgrading the fund manager.
The report recommends the creation of an industry working group, led by the Department for Work and Pensions. I am delighted to say that Guy Opperman MP, the Minister for Pensions and Financial Inclusion, has endorsed this recommendation.
While welcoming our report he did not mince his words: “I am determined we are going to bring about real change on this issue,” he said.
Finally, I do understand that fund managers may be struggling to meet the demand on client reporting requirements given increased regulation, but I hope that this report will be a wake-up call. Their business models must change – and investment must be made –to accommodate the new reality.
Power must shift from fund managers to pension funds. I am confident that the proposed working group can help to make this a reality.
1) http://redlinevoting.org/what-is-red-line-voting/
2) Bringing shareholder voting into the 21st Century. An examination of the barriers to effective stewardship and how to overcome them. https://amnt.org/report-2020/
