By Eric Dutram, Contributor, DWS
What is behind the surge in interest for investments that adhere to Environmental, Social and Governance (ESG) standards? Part of the move may be to utilize the risk-mitigation principles of ESG, but it seems likely that most are looking to align values with portfolios or to create change while still investing in a prudent manner.
This shift has already resulted in more than $1.4 trillion in U.S. assets under management in ESG, while over 1,200 funds now utilize some form of the strategy as well.[1] And with heightened focus on social and, to a lesser extent, environmental issues as of late, interest in ESG investing could continue to march higher in the months ahead as well.
Yet, while there may be a near limitless number of ways to invest with ESG principles these days, many investors fail to consider a key aspect of the process; proxy voting. This process allows shareholders to send a message to corporate managers and change policies in a very direct and meaningful way in some cases.
Since major asset managers often have significant proxy voting capabilities at their disposal, this group often has the ability to move the needle in terms of getting key issues passed or stopping them from moving across the finish line. However, unlike the relatively uniform application of many ESG principles—such as removal of companies that produce items like tobacco, banning controversial sourcing of supply chain components or robust transparency policies—the application of proxy voting varies from manager to manager.
In fact, according to data from Morningstar, while there is a clear trend towards more support of ESG proxy votes among asset managers over the past half-decade, it was still at just 46% last year.[2] This left a number of policies, ranging from reporting on political spending or workforce diversity to emission reductions and supply chain disclosures, short of passage at companies across the market capitalization spectrum in the United States.
With this backdrop, those with a true interest in creating an impact with their ESG investments may want to consider the proxy voting history of their asset manager. Over the past five years, some have supported as few as 1% of votes on environmental and social issues while others support the majority of resolutions or even in the 70%-80% range. Given the wide disparity, selecting a manager with a robust commitment to proxy voting may have more of an impact than you think.
As shown in the chart above, we have supported the most resolutions out of 50 asset managers for the five year time period of July, 2014 to the end of June, 2019. Our track record in this regard and is in stark contrast to some of the major asset managers in the field which have struggled to even hit the 10% mark for environmental and social proxy vote support.
This is particularly important when considering the size of asset managers’ positions and the many close votes that may have swung in a different direction if a more supportive asset manager was making the selection. According to Morningstar, there were 23 times in the most recent study year of July, 2018 to the end of June, 2019 where an environmental or social resolution failed by less than 10% of the vote. If assets at a few of the largest managers were at more supportive firms, some of these votes may have turned out differently, potentially helping to advance the cause of ESG in the process.
Bottom line
Many of the world’s top asset managers claim to be supportive of ESG principles but fail to vote for even one in ten or one in twenty of the environmental and social proxy votes when given the chance. One has to question a firm’s real level of commitment to the furthering of ESG when these kinds of results are the case, particularly when a slight shift in voting could make the difference between passage and failure.
So, for those looking to make an impact with ESG, a given fund’s strategy is only part of the process. Remember to consider the proxy voting history of the asset manager as well, as this can be where the real difference in strategy lies.
1. Source: Morningstar as of 3/31/20. Data represents U.S. domiciled ETFs and Mutual Funds
2. Source: Morningstar as of 02/13/20. 2019 ESG Proxy Voting Trends report