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Leanne Clements: New ESG rules undermined by fund management industry

16 Oct 2019

Leanne Clements is campaign manager, red line voting at the Association of Member Nominated Trustees (AMNT)

The regulatory push for UK pension schemes to integrate financially-material environmental, social, and governance (ESG) issues into their investment strategy has never been greater. However, should pension schemes decide that is it in their beneficiaries’ long-term best interests to develop, for example, their own voting policies on financially-material ESG issues, they need to work with fund managers who are willing to execute these policies.

However, with respect to pooled fund arrangements, the fund management community is unwilling to do so as a matter of policy across virtually all clients.

Fund managers put forward many practical arguments justifying their refusal to implement client voting policies in pooled fund arrangements, including resource and technological constraints, most of which could be resolved with greater investment in the stewardship function. However, the remaining arguments presented represent the greatest barrier to developing solutions to address this issue. This barrier is deeply rooted within the culture of the organisation. Put simply, they just don’t want to do it.

Since its inception, the responsible investment agenda has been predominantly driven by the fund management community. As a result, their business models have evolved to reflect this reality: responsible investment teams have been created and grown to develop and implement their own house ESG policies and in essence, sell their ESG expertise to the asset owner community as part of their overall marketing proposition. Therefore, implementing client bespoke policies could pose a threat to their internal ESG expertise, or to put it another way, their “responsible investment brand”, challenging their unique selling point. As a result, there remains a strong incentive to maintain the status quo. As a confirmation of this perspective, AMNT has consistently received feedback from fund managers that they, not asset owners, are best placed to develop these policies.

To test this theory, AMNT conducted a review into the public voting policies and practices of more than 40 fund managers and found the results less than stellar. For example, more than half of fund managers do not have a climate change-related voting policy or guideline in their voting policy, whilst more than 30% made no reference to gender diversity. They told AMNT that they cannot accommodate client voting policies because when they buy the fund, they also buy the fund manager’s voting policy. Therefore, we have a system in which the fund management industry is lagging on how they are holding companies to account on financially-material issues such as climate change. So if asset owners wish to override fund managers with their own best practice voting policies, such as AMNT’s Red Line Voting Initiative, they are unable to do so.

This seriously undermines the effectiveness of the new regulatory developments on ESG and stewardship, and AMNT believes that intervention by the Financial Conduct Authority is required to address this issue.

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