A few weeks ago Forum Nachhaltige Geldanlagen, the social investment forum for German-speaking investors, presented its market report for 2014. The report showed that sustainable/environmental, social, governance (ESG) investments have once again grown more than the average for local and European fund markets; the assets under management in sustainability/ESG products in Austria, Germany, and Switzerland increased 47%–up to 197.5 billion euros over the course of 2014. This impressive growth rate showed that more and more investors looked for investment products that use certain ESG criteria when they selected securities for their portfolios. In other words, it seems the market for ESG-related investment products became wider and deeper over the course of 2014.
A closer look at the numbers for the underlying strategies of the funds shows that “overlay strategies” have become very popular and are not used exclusively by sustainability funds; some asset managers have introduced overlay strategies to their whole product range. From my point of view, this means sustainable investment has left its niche and is becoming a mainstream approach in German-speaking markets.
Even though it is not new, it seems the “engagement strategy” has become much more popular over the last year. This is a bit surprising, since engagement strategies require a lot of resources, meaning these strategies are more labor intensive and therefore are a bit more expensive than other ESG strategies. In return, an engagement strategy promises to deliver the best results with regard to ESG performance for the fund manager.
When employing an engagement strategy, a number of fund managers do not use a positive/negative screening or other SRI/ESG values as the main criteria for securities selection. Instead, the fund manager buys into a company and tries to change the corporate strategy to a more sustainable strategy, i.e., influencing management so the company shows better SRI/ESG-related performance in the future. Engagement strategies are defined as long-term strategies that use the dialog between the company and the investor as a tool to transform companies with bad ESG-related performance to good ESG performers. This strategy is seen as one of the best, since company management can react only in the right direction when it knows what investors expect it to do with its ESG/SRI strategy.
Exercise shareholder voting rights
Another strategy used is to exercise shareholder voting rights to change the strategy of a company. This is a very powerful tool; a company is owned by its shareholders, and if the shareholders vote against a proposal made by company management, management has to follow the decision of the owners and can’t follow its own agenda. To achieve their goals fund managers can team up with other shareholders and build so-called voting pools to increase their power for or against voting proposals and/or other actions undertaken by the management of the company.
In this regard, it is remarkable that–unlike a few years ago–one sees nowadays more and more fund managers raising their voice during shareholder meetings to clarify their position and their expectations with regard to corporate governance and voting proposals. A fund manager does not have to be present at the shareholder meeting to exercise voting rights, since the manager can use an agency or send a deputy to exercise the voting rights in the favor of the fund manager. The use of an agent has become more popular over the last few years, since different shareholder meetings could be held on the same day, could be held in an inconvenient location, or might collide with a manager’s other duties.
Even though some asset managers try to make their approach transparent by publishing how they have voted at shareholder meetings, there is still a huge lack of transparency with regard to the exercising of voting rights in the wider fund management industry.
The duties of a fiduciary
From my point of view, the emerging trend toward engagement strategies and exercising voting rights is quite positive, since the actions may help change the general behavior of corporate managers. This could lead to more sustainable corporate governance standards overall in the future; companies are owned by the investors and management needs to act in the favor of the investors. It is very positive that more and more fund managers use shareholder meetings to express to a wider audience their views on corporate strategies and voting proposals, which could then increase support for the fund manager over the company management.
It is also very positive that some fund managers have started to act when the management of a company does not change its behavior. For example, these fund managers could sell the stock of some companies and even disclose their actions to the media.
Even though exercising shareholder voting rights has become more popular over the last few years, there are still a number of fund managers in the industry who do not use voting rights and do not disclose to their investors information about how they have voted at shareholder meetings. From my point of view, fund investors of all kinds of funds should claim the right to have this kind of information. It is the duty of fiduciaries to act in the best interests of investors; they must attend shareholder meetings and vote if the proposals at the shareholder meeting are not in the best interest of their investors.
This lack of action and transparency was recently shown in a study on the German asset management industry published by the German daily newspaper Börsen-Zeitung. It was no surprise that Union Investment was mentioned as the most active and transparent asset management company, since it is known for its active approach to exercising shareholder voting rights. Another study conducted by the U.K. shareholder activist group ShareAction came to the conclusion that a number of large asset managers have supported controversial voting proposals in the favor of company management instead of challenging the managers to change their behavior. This shows there is a lot of room for improvement in the asset management industry regarding shareholder voting rights when it comes to fulfilling the duties of a fiduciary.
The views expressed are the views of the author, not necessarily those of Thomson Reuters.