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Asset managers are yet to truly embrace sustainability

Asset managers are yet to truly embrace sustainability

24-02-2021 | Research
Proxy voting is a powerful tool for shareholders to steer corporate agendas towards sustainability-focused decision making. Despite the increased attention to the integration of sustainability in investment solutions, asset managers generally vote against environmental and social proposals. This trend is more pronounced among large and passive players.
  • Wilma de Groot, PhD
    Wilma
    de Groot, PhD
    Head of Core Quant Equities and Co-head of the Quant Equity Portfolio Management team
  • Jan de Koning
    Jan
    de Koning
    Portfolio Manager

Speed read

  • Asset managers vote against most environmental and social proposals
  • Asset owners can play a leading role in shaping voting behaviors 
  • Regulatory initiatives may compel more favorable voting patterns 
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Sustainable investing has gathered momentum in recent years. This is illustrated by the significant rise in assets invested in sustainable equity strategies, which have tripled from USD 200 billion to USD 600 billion over the last decade. According to PwC, these assets will outpace those in regular investment strategies by 2025, in Europe.1  

By investing in funds that integrate environmental, social and governance (ESG) criteria, asset owners aim to contribute to a better world. In turn, asset managers are tasked with constructing portfolios to meet these requirements, but their duties do not end there. They can also cast their vote at shareholder meetings and steer the corporate agenda towards sustainability-focused decision making.

However, our research – covering a decade of US shareholder voting by the largest 50 asset managers – reveals that the number of submissions brought forward on environmental and social issues has remained consistently low, less than 1% of all proposals. This contradicts the increased interest in sustainable investing over the last decade.

By investing in funds that integrate ESG criteria, asset owners aim to contribute to a better world

Moreover, asset managers generally vote against most environmental and social proposals. This is even more pronounced among large and passive players as Figure 1 and 2 show. Access to larger voting teams, compared to their smaller peers, did not yield more positive voting trends for large asset managers. For passive counterparts, cost pressures have led to standardization across engagement and voting operations in a bid to minimize expense ratios.

Figure 1 | US asset managers voting in favor of environmental proposals (sorted on AuM)

Source: Groot, de, W., Koning, de, J. and Winkel, van, S., February 2021, “Sustainable voting behavior of asset managers: Do they walk the walk?”, working paper.

Figure 2 | US asset managers voting in favor of social proposals (sorted on AuM)

Source: Groot, de, W., Koning, de, J. and Winkel, van, S., February 2021, “Sustainable voting behavior of asset managers: Do they walk the walk?”, working paper.

In addition, signatories of the United Nations-supported Principles for Responsible Investment (UN PRI) initiative have unfortunately not made a tangible difference. These managers did not vote more in favor of sustainability-related proposals than those outside of the network. This is despite the ESG-focused guiding principles they ascribe to when they join the organization.

Actively exercising our stewardship responsibilities is an integral part of Robeco’s sustainable investing approach. By making active use of our voting rights on behalf of our clients, we can encourage companies to increase the quality of their management teams and to improve their sustainability profile. We expect this to contribute to shareholder value creation in the long term.

Robeco’s voting track record on environmental and social issues demonstrates our commitment to change the corporate agenda. Figure 3 illustrates Robeco’s high share of votes in favor of ESG proposals, while Figure 4 depicts the positive evolution of this trend. It is important, however, to acknowledge that no asset manager can always vote in favor of all proposals, as some are not deemed to be realistic or reasonable. 

Figure 3 | Asset managers voting in favor of ESG proposals (2018)

Source: Robeco and Institutional Shareholder Services (ISS) - obtained through Wharton Research Data Services (WRDS). Data is based on over 500,000 fund-votes cast on ESG proposals by the ‘big three’ passive managers and Robeco in the first half of 2018.

Figure 4 | Asset managers voting in favor of environmental and social proposals

Source: Robeco and Institutional Shareholder Services (ISS) - obtained through Wharton Research Data Services (WRDS). Data is based on over 100,000 fund-votes cast on environmental and social proposals by the ‘big three’ passive managers and Robeco in the sample period (January 2012 through June 2018).

In order to ‘walk the walk’ instead of ‘talking the talk’, asset owners can encourage their managers to increase the number of proposals filed on environmental and social topics. This may be an important first step as the currently low figures could be sending a negative signal to directors about the importance of these issues. Asset owners can also make the assessment of sustainable voting practices an integral part of their manager selection, due diligence and monitoring.

To be sure, filing numerous shareholder proposals is a daunting task for asset managers, given the sheer number of listed companies and the vast amount of work involved. But we believe these obstacles can be addressed if asset managers join forces and mutually coordinate the steering of corporate agendas. Such coordination may even lower the costs of these activities for each manager, while increasing the impact on corporate decision making.2 

Finally, regulators can make the central filing of voting records mandatory for asset managers and owners. This information may then be made publicly available. Such a transparent system is already in place for funds domiciled in the US (N-PX database). If voting records are disclosed, the beneficial owners (e.g., pensioners, etc.) will be able to see to if their asset managers are truly deploying their money in a sustainable manner.

1Financial Times, November 2020, “ESG funds forecast to outnumber conventional funds by 2025”, https://www.ft.com/content/5cd6e923-81e0-4557-8cff-a02fb5e01d42
2Dimson, E., Karakaş, O., and Li, X., November 2020, “Coordinated Engagements”, European Corporate Governance Institute – Finance Working Paper No. 721/2021.

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