The short-term interests of asset managers may be trumping the long-term interests of their institutional investor clients when it comes to stewardship, which has lead UK pension funds to call for urgent action.
UK Asset Owner Stewardship Review 2023 published this week conducts research into the alignment of asset owners’ long-term interests and their managers when voting at major oil and gas companies within the global universe of the Transition Pathway Initiative (TPI).
The results paint a less that flattering picture of asset managers’ approach to corporate governance.
First, only “very selected asset managers publicly reason like asset owners” with some considering voting and ESG engagement as “mutually exclusive and appear to fear the loss of access to management if they voted against them”.
Report author Andreas Hoepner, Full Professor of Operational Risk, Banking & Finance, Smurfit Graduate Business School, University College Dublin, said: “Among asset managers, there appears to be a substantial divergence as to their interpretation of shareholders’ and even society’s interests. Some asset managers are aligned with asset owners, while others have fundamentally different views that may be consistent with short-term commercial interest but do not reflect scientific evidence.”
That asset managers are failing to align with their asset owners is cause for alarm for advocates of responsible investment who note that not only is this a potential dereliction of the managers’ duties, but also poses a potential threat to the realisation of Net Zero targets.
Hoepner says: “UK asset owners have been concerned that despite unequivocal warnings from the United Nations and the Intergovernmental Panel on Climate Change of the risks of delayed action on climate change, short-term interests of asset managers may be trumping long-term interests of pension funds.”
He continued: “Delayed action on climate increases the chances of a disorderly climate transition and missing the goals of the Paris Agreement. This in turn increases the risks to pension funds’ long-term financial sustainability and the ability of those funds to serve the interests of their members/beneficiaries.”
The report identifies three causes of the misalignment between asset owners’ interests and the stewardship action taken by their asset managers.
First is culture – many of the asset owners surveyed are UK-based while their fund managers are global with a US focus. Hoepner says he plans to extend the research to investors worldwide.
Second is a “fundamental misunderstanding as to the relevance of stewardship and voting itself and “the urgency of climate change as a key priority theme within stewardship”. Hoepner plans to explore fund managers’ “stewardship resource insufficiencies” to establish if there is a link between misalignment and stretched governance teams.
Finally, Hoepner will investigate whether a “conceptual misunderstanding of fiduciary duty itself” is behind asset managers’ reluctance to exercise voting in a way they perceive as potentially damaging to their investors’ returns.
Irrespective of the reasons, however, Leanne Clements, Head of Responsible Investment for The People’s Partnership, notes that there must be an urgent resolution to what she calls “an impasse with respect to Net Zero stewardship”.
“We are running out of time. Urgent action is needed from the entire stewardship chain to address the misalignment issue identified in this research. A complete dismantling of failed status quo approaches to stewardship is needed by the fund management industry, with voting escalation not seen as a last resort approach used on an exceptions basis, but rather a powerful signal to companies of what investors expect of them. A continued lack of industry action will seriously undermine the financial sector’s ability to deliver not only its own net zero commitments, but more importantly, better outcomes for savers.”