By Isobel Mitchell, Networks Officer - CRIN
There are a dizzying number of actors who make up the investment system – asset managers, consultants and asset owners, to name just a few!
One actor that has historically hidden in the shadows of the investment system are proxy advisors.
Proxy advisors are for-profit firms who provide services to asset managers. They are best known for making recommendations on how investors should vote at a company’s annual general meeting (AGM).
Voting at these meetings is the primary means by which asset managers can exert influence over the companies they invest in. This includes issues such as climate change, human rights and lobbying.
Asset managers have a legal duty to vote in the best interests of the charities, pension funds and universities whose money they are investing.
The role of proxy advisors in investor voting therefore raises a host of concerns for responsible investors. How much influence do proxy advisors’ recommendations have? Do these recommendations allow investors to ‘sleepwalk’ their voting? Do proxy advisors give recommendations that are in asset owners’ best interests?
Our latest research, as part of the Charities Responsible Investment Network (CRIN), aims to lift the lid on the role of proxy advisors in investor voting on environmental, social and lobbying issues.
The report - “Another Link in the Chain” - compares the voting decisions of asset managers (based on 127 shareholder resolutions) to their proxy advisors’ recommendations. These resolutions cover environmental, social and lobbying concerns.
The results were surprising, and showed negative and positive sides to asset managers’ stewardship of companies.
The good news
There is little evidence to suggest a systematic overreliance on the recommendations of proxy advisors for environmental, social and lobbying proposals. This indicates that asset managers do not systemically ‘sleep vote’ or ‘auto-vote’ with their proxy advisors’ benchmark recommendations.
It refutes accusations that proxy advisors have too much influence – an argument which has helped land proxy advisors in the SEC’s crosshairs. The US regulator recently closed a consultation that proposed new rules for how the firms operate.
The bad news
The downside of this is that there is evidence that the majority (65%) of investors – including many commonly used by charities – in fact vote less progressively than their proxy advisors recommend.
Take the ‘Big Three’ asset managers - BlackRock, Vanguard and State Street - who collectively control over $11 trillion assets and an average of 25% of the votes at the largest U.S. companies. They are among the worst offenders, lagging behind their advisors’ positive recommendations by up to 74%.
Vanguard supported only 6% of the 120 resolutions that they voted on, despite their advisor ISS recommending support for 80%.
A lack of ambition
Far from ‘sleepwalking’ their votes on these crucial issues, asset managers are showing signs of being much less progressive than their proxy advisors.
Why might this be the case?
This could signal that these asset managers are receiving tailored voting recommendations based on their own voting policy. If this is the case, they are using a voting policy which is less progressive than the most widely used proxy advisors.
Or, perhaps these managers are receiving benchmark (non-tailored) recommendations from their proxy advisor, but choosing to ignore them in favour of voting down action on environment, social and especially lobbying issues. For example, Vanguard and BlackRock voted against their proxy advisors' positive voting recommendations on lobbying resolutions 95% and 91% of the time respectively.
Why does this matter?
For any asset owner who cares about their money powering positive change, this should be a worrying finding.
The companies included in this study – from BP to Facebook – literally build the world around us.
Asset managers have both the voice and vote to encourage investee companies to act on issues such as climate change, workplace equality and democracy. Where they are choosing to vote down these key issues at company AGMs – even against the recommendations of their proxy advisor – clients should question whether they are fulfilling their duty to vote in their best interests.
We urge charities, universities, and other asset owners to use their power as investors and clients. Push your asset manager to explain how their voting decisions foster a more just and sustainable world.
