Podcast Summary: "Lindsey Stewart, CFA: Proxy Voting and Investor Engagement Practices"
Podcast Information:
- Title: The Sustainability Story
- Host/Author: CFA Institute
- Episode: Featuring Lindsey Stewart, CFA from Morningstar Sustainalytics
- Release Date: July 8, 2024
Introduction
In this episode of The Sustainability Story, co-host Nicole Gehrig engages in an insightful conversation with Lindsey Stewart, CFA, the Director of Stewardship Research and Policy at Morningstar Sustainalytics. The discussion delves into the evolving landscape of ESG (Environmental, Social, and Governance) investing, focusing on proxy voting and investor engagement practices across different regulatory environments.
Regulatory Environments: Europe vs. the United States
Lindsey Stewart begins by contrasting the regulatory frameworks governing sustainability in Europe and the United States. He highlights Europe's double materiality regulation, which mandates businesses to consider both financial returns and their impacts on the environment and society.
Lindsey Stewart, CFA ([02:10]): "In Europe, there is a lot more intentionality when it comes to climate and sustainability themes than there is in say, the United States... we're seeing that difference very starkly when we start looking at the interactions between US Asset managers and European asset managers and the companies they invest in."
In contrast, the U.S. operates under a fiduciary duty framework that has historically emphasized financial returns to shareholders, with ESG considerations being more debated and less prescriptive.
Proxy Voting Practices and Trends
Stewart discusses research published in January, which examines the proxy voting records of major asset managers in the U.S. and Europe. The findings reveal a significant disparity:
- European Managers: Consistently support key ESG resolutions at nearly 98% over the past three years.
- U.S. Managers: Support dropped from about 66% in 2021 to 50% in 2023.
Stewart ([02:10]): "European managers have a lot more freedom to incorporate environmental and social priorities within their investment process, shown by their consistent high support for key resolutions."
The decline in U.S. support is attributed to what some U.S. managers perceive as lower quality or redundant proposals, which they feel do not align with fiduciary duties or are overly prescriptive.
Say on Climate Votes
The conversation shifts to "say on climate" votes, where companies seek shareholder approval for climate reporting and transition plans. These have been particularly popular in Europe and Australia but remain rare in the U.S.
Stewart ([09:16]): "Say on climate votes have not taken off in the United States... they're staying in Europe."
Support for these votes has fluctuated:
- Overall Support: Dropped from 93% in 2021 to 87% in 2022, then rose to 91% in 2023.
- European Managers: Initially 92% support in 2021, declining to around 70% in subsequent years.
The decline is due to varying expectations regarding the ambition and quality of climate plans, with some managers seeking higher accountability and others questioning the role of shareholders in approving corporate strategies.
Climate Action 100+ Initiative and Accusations of Collusion
Stewart addresses recent departures of five large U.S. asset managers from the Climate Action 100+ initiative amid accusations of collusion.
Stewart ([15:35]): "When we looked at those voting records, we'd seen that signatories were voting in very different ways. There was a very wide range of support levels even within those five institutions."
His research indicates no substantial evidence of collusion, as voting patterns among former and remaining signatories were diverse, suggesting varied individual reasons for their departure rather than coordinated action.
Impact of Proxy Advisors on Voting Outcomes
The role of proxy advisors, namely ISS and Glass Lewis, is examined. Despite concerns about their influence, Stewart's research finds:
Stewart ([18:30]): "They [proxy advisors] do not have anything like the power that is being attributed to them when it comes to making voting decisions. Advisors advise, but investors decide."
His analysis shows that large asset managers vote differently on key resolutions, indicating that proxy advisors do not disproportionately sway voting outcomes.
Investor Engagement Practices
Transitioning to engagement, Stewart emphasizes the importance of active dialogue with specific and targeted objectives.
Stewart ([21:08]): "Engagement is active dialogue with a specific and targeted objective... to preserve and enhance the value of assets on behalf of beneficiaries and clients."
He references the UK Investor Forum’s definition, advocating for continuous, objective-driven engagement rather than one-off interactions.
Engagement vs. Divestment
A heated topic in the ESG space, the discussion compares engagement and divestment as strategies for investors.
Stewart ([25:03]): "Divestment has to be in the toolbox for many investors... whereas other investors see themselves as partners with companies in helping them get to that destination."
He notes that while divestment is suitable for purpose-driven investors prioritizing high ESG standards, engagement serves those looking to influence company practices without altering their investment positions. Stewart warns against "paper decarbonization," where divestment does not lead to meaningful environmental impact.
UK Stewardship Code: Setting Standards for Stewardship Practices
The UK Stewardship Code is recognized as a pioneering framework guiding asset owners and managers in their stewardship activities.
Stewart ([28:42]): "The UK Stewardship Code helps guide asset owners, asset managers and even service providers towards defining what their sustainability and governance objectives are."
Feedback from institutional shareholders suggests valuing its emphasis on aligning activities with measured outcomes. However, some report the annual reporting process as onerous, suggesting a need for more streamlined or periodic reporting.
Future Research and Conclusion
Looking ahead, Stewart outlines ongoing research efforts aimed at analyzing the 2024 proxy season results, focusing on environmental and social priorities among asset managers. He anticipates publishing new insights toward the end of summer 2024.
Stewart ([30:59]): "We hope it continues to be helpful... once the annual disclosures are published."
The episode concludes with acknowledgments, encouraging listeners to subscribe to the Stewardship Snapshot newsletter and access Stewart's research on Morningstar's website.
Key Takeaways
- Regulatory Impact: Europe's stringent ESG regulations foster higher support for sustainability initiatives compared to the U.S.
- Proxy Voting Trends: European managers consistently back ESG resolutions, while U.S. support has waned due to concerns over proposal quality.
- Say on Climate: Predominantly a European and Australian phenomenon, with minimal traction in the U.S.
- Collusion Concerns: Recent exits from Climate Action 100+ do not indicate collusion based on diverse voting records.
- Proxy Advisors: Limited influence over actual voting outcomes, with investors retaining decision-making power.
- Engagement vs. Divestment: Both strategies have their place, contingent on investor priorities and desired impact.
- UK Stewardship Code: Serves as a benchmark for stewardship practices, though reporting demands may need reassessment.
- Ongoing Research: Continuous analysis of proxy voting and engagement practices remains crucial for informed ESG investing.
This comprehensive discussion provides valuable insights into the nuances of proxy voting and investor engagement within the ESG landscape, highlighting the significant differences between European and U.S. practices and the evolving strategies investors employ to promote sustainability.