Stewardship in the spotlight: Our hopes for voting practices in 2023
Stewardship in the spotlight
At the beginning of a new year, journalists, industry commentators and thought leaders tend to publish their predictions for the year ahead. Unsurprisingly, this content is popular in the sustainable investing industry, given the rate of development it’s seen recently. This year, one reoccurring theme we’ve noticed, and that has (naturally) piqued our interest, is that stewardship will continue to rise up the agenda.
It’s probably a fair assessment that, as WHEB’s Stewardship Analyst, confirmation bias could explain why these opinion pieces stand out to me particularly. So, it’s worth digging into some of the reasons why stewardship is being seen as increasingly important to investors.
In large part, regulatory forces aiming to deter greenwashing are behind this. For example, in the UK, the 2020 renewal of the FRC’s Stewardship Code now requires signatories to provide concrete evidence that they are taking steps to carry out stewardship duties, including reporting on the outcomes of their actions1 Concurrently, the FCA’s proposed Sustainable Disclosure Requirements (SDR) are expected to introduce stewardship as one of five principles against which products should be assessed to determine whether they qualify for a sustainability investment label2. Meanwhile, in the US, record numbers of shareholder resolutions were filed in 2022, likely due to a more welcoming stance from the SEC3.
Other forces are also at play though. Notably, stewardship is now recognised as a core contribution in impact investing in listed equities, as per a report published by the Global Impact Investing Network (GIIN)4. Additionally, stewardship is also getting more airtime as financial institutions deploy stewardship strategies to achieve targets under commitments such as the Net Zero Asset Manager’s Initiative.
Nonetheless, amongst all the predicted activity around stewardship in 2023, there is the risk that the actions of asset managers and owners will be ‘performative’ and used to greenwash corporate reputations. However, where focused on outcomes that achieve real world impact, stewardship presents an opportuntiy to deliver greater value for investors.
Cutting through the jargon – what exactly is stewardship?
To understand how to be effective stewards, it’s important to know what, exactly, we’re referring to when we talk about investment ‘stewardship’. Essentially, stewardship is the responsible management of money by asset owners and managers, on behalf of savers and pensioners, to create sustainable benefits for the economy, the environment and society5.
For WHEB, stewardship is achieved through the following elements:
1. Allocation of capital: WHEB’s strategy is focused on investing in solutions to sustainability challenges.
2. Proxy voting: exercising our shareholder voting rights, at annual general meetings (AGMs) and other meetings
3. Company engagement: dialogue with investee companies bilaterally and with other investors, on a collaborative basis, using escalation tactics where appropriate.
4. Public policy and industry engagement: broadly aimed at the wider financial system, indirectly supporting positive impact businesses.
5. Reporting: communicating efforts back to investors.
‘There’s no such thing as a vote that doesn’t matter’6: WHEB’s approach to voting7
As equity holders, our voting rights are an opportunity to exercise progressive influence on investee company strategy and governance. We therefore endeavour to vote all our shares, following the guidelines set out in WHEB’s demanding voting policy8.
To achieve effective outcomes, we use voting to complement our other stewardship strategies. Our objective isn’t just to fulfil an obligation as part of a siloed process, but to use voting alongside wider engagement with company management to achieve a change in policy or performance.
For example, when voting against management’s recommendations9, WHEB’s policy is to explain to the company why we have done so which often leads to further dialogue with management. This way, even if the vote outcome is not what we hoped for, our time has been well spent as the activity has enabled a conversation with the company., which we find most effective for driving change.
WHEB’s voting policy is therefore primarily designed to guide voting on core governance and sustainability issues in relation to routine proposals10.
Routine resolutions occur far more frequently than shareholder resolutions relating to ESG issues. In 2022, a mere 1% of the resolutions WHEB voted on were proposed by shareholders and none related to environmental or social issues 11. This is likely because WHEB’s investee companies tend to avoid major social or environmental controversies and do not therefore attract regular shareholder resolutions.
WHEB’s approach is uncommon among fund managers as many voting policies, especially those offered by proxy advisers, tend to focus voting guidance on sustainability issues only in relation to shareholder resolutions.
However, we find it advantageous to have a highly proactive policy that enables opportunities for conversations with company management and to exercise good stewardship. Combined with the high standards we require from our companies; this reinforces WHEB’s impact-focused investment strategy.
Transparency and accountability are central to WHEB’s philosophy, so reporting voting activity is important to us. We have published all our voting activity, including voting rationale, for a long time now12. This is more resource intensive than publishing summary statistics which, while helpful (and we do also publish13), doesn’t tell the whole story. Qualitative justifications linking activity and policy ensure accountability to our investors and provide assurance that capital is being managed in line with our policies.
Our hopes for voting practices in 2023:
We believe that stewardship practices will be under greater scrutiny in 2023, and welcome this. There exist significant inefficiencies in voting practices obstructing better outcomes for investors. These include:
1. Broader adoption of more proactive and demanding voting policies from both managers and proxy advisors
We’ve reviewed the policies14 of a variety of proxy advisors and were disappointed to discover that guidance for encouraging improvements in sustainability issues is limited, almost exclusively, to shareholder proposals. While important, shareholder proposals rely on significant administrative effort of individual managers which limits their use to a small proportion of companies.
There are some early signs of change. ISS is developing policies that recommend voting against routine resolutions, such as the re-election of directors, where there is insufficient climate board accountability15. However, the pace and scope of change needs to step up if the significant influence of proxy advisors it to further drive real economy impacts.
2. More transparency surrounding pre- and post-vote rationale
Pre-vote disclosures can be resource intensive as they involve shorter timescales. We are, however, supportive of them as they enable using voting as a means of capturing management’s attention.
To improve effectiveness, asset managers need a means of seeing how and on which resolutions their peers intend to vote when protesting poor company behaviour. This could create opportunities for collaborative voting, amplifying investor concerns and increasing the probability of further engagement.
More common is post-vote disclosure of voting rationales, which is something WHEB has done for a long time. However, the industry lacks a robust reporting infrastructure that enables asset owners to easily compare how managers are voting. Fintech solutions are being developed for this purpose but, currently, cater to managers with policies based on shareholder resolutions rather than routine votes. Sadly, this makes them unsuitable for proactive voting policies like WHEB’s.
We look forward to voting at AGMs this year as an opportunity to press for more progressive changes on critical social and environmental issues. We also expect to see further advances in voting disclosure ‘infrastructure’ for the industry.
In the meantime, we think asset managers should be very clear regarding the extent to which:
a) they are voting against management’s recommendations on all resolutions, not just shareholder resolutions;
b) their voting policies are based off those of their proxy advisers; and,
c) their voting is in line with proxy adviser recommendations.
1 Previously, the Code required signatories to report only how their policies were aligned without any need to provide evidence of how policies were being consistently applied.
6 Barak Obama
7 We will cover our approach to other elements of stewardship in forthcoming blogs. To begin with, and in the lead up to the 2023 AGM season, we want to outline what we think makes good stewardship in the context of proxy voting.
8 WHEB’s policy was developed using the AMNT Red Lines and is available here: https://www.whebgroup.com/assets/files/uploads/20221201-wheb-voting-policy.pdf
9 We also typically write when we abstain from a particular vote. In some cases, companies have policies which only offer investors the option of voting for a policy or abstaining.
10 For instance, where there is no board-level responsibility for sustainability, our policy recommends a vote against a the election or re-election of the Chair of the Board.
11 In 2022, a total of 6 out of 583 resolutions were proposed by shareholders and related exclusively to governance issues.
13 Summary statistics on voting can be found in our stewardship reports: https://www.whebgroup.com/reporting-impact-investment/stewardship-reports and our quarterly reviews: https://www.whebgroup.com/impact-investment-funds/sustainability-fund-oeic
14 Such as those from ISS, Glass Lewis, and Sustainalytics, including some specialty policies
15 However this relates only to ‘significant GHG emitters’ https://www.iigcc.org/resource/net-zero-stewardship-surgery-proxy-voting-and-say-on-climate/