The rise of split voting– is the onus now on asset owners?

2023 has been a year of major U-turns on climate among fossil fuel giants with firms such as Shell and BP backtracking on earlier net zero pledges. Despite their reduced ambitions to tackle climate change, some of the world’s largest investors have not increased their backing for activist resolutions.

For example, BlackRock’s support for shareholder proposals at oil and gas firms fell sharply, from 47% in 2021 to 22% last year to a mere 7% year to date. The trend was even more severe at Vanguard, which backed only 2% of shareholder proposals for oil and gas firms this year, down from 12% last year.

This has been met with frustration by an increasingly vocal minority of asset owners who feel like their ability to exercise influence over the fossil fuel industry is being curtailed by a silent majority of the world’s largest investors.

This sense of disconnect may have been accelerated by a shift towards cheaper index-based funds and the growing concentration of the asset management industry, with the big three asset managers, BlackRock, State Street and Vanguard now representing 43% of the US fund market, according to Morningstar.

Managers have responded to this criticism by offering investors in pooled funds access to split voting. BlackRock, StateStreet and Vanguard are now all at different stages of rolling out split voting options to their institutional and even retail clients.

BlackRock launched its voting choice option two years ago. It now says that all American public and corporate pension funds now have access to voting choice, with investors representing more than $550bn in assets having now signed up to its voting choice programme.

Across the pond, investors are following suit. In the UK, Legal and General Investment Management has teamed up with fintech firm Tumelo to enable pass through voting to its institutional investors. Meanwhile, DC master trust Smart Pension has invested £550m in a DWS fund which offers access to split voting facilitated among others by Minerva Analytics.

For investors who are predominantly invested in pooled funds, split voting could play a vital role in reaching their net zero targets. For example, the LGPS Pool London CIV said in its latest Task Force on Climate Related Financial Disclosures report that passively managed pooled funds were on average 24% more carbon intensive than funds managed in-house.

Asset owners who do not have the ability to manage funds in-house could see split voting as an option to still exercise stewardship. In the UK, the defined contribution market and LGPS funds are potential areas of growth for split voting solutions. 

Tumelo offers a service to asset managers that enables the underlying asset owners to vote on certain policies or specific issues. “You could vote with asset managers for most of the year, but there might be specific votes on which you’d want to take a different stance,” explains Georgia Stewart, CEO and co-founder of Tumelo.

She notices increased appetite among asset owners to have their say. “Pension funds have started to look more closely at the investment managers they work with and have noticed divergent voting among them. Some managers actively engage in voting, while others abstain, especially in the context of net-zero votes. If you are committed to a net zero stewardship approach, addressing these discrepancies becomes essential,” she argues.

Misalignment

While split voting is picking up pace, this year’s annual general meeting season illustrated that there can still be high levels of misalignment between voting among asset managers and owners. Research by Tumelo shows that last year, BlackRock, Fidelity and Vanguard backed between 96% and 99% of all management proposals and they are considerably less likely to support resolutions put forward by shareholders. Last year, BlackRock only backed 25% of climate resolutions.

This is a problem, particularly for asset owners in pooled funds who wish to pursue more ambitious net zero targets argues Lindsey Stewart, director of investment stewardship research at Morningstar. “All except for the very large mandates tend to be in pooled funds because it is lower cost and easier to administer for the service provider. That means the stewardship restrictions on pooled funds will affect all but the very largest asset owners who are invested in segregated mandates,” he says. 

But some large asset owners are now calling on managers to take a more ambitious stance. For example, Dutch pension fund PGGM, which manages €293bn in assets took to the media this month to call out asset managers for failing to live up to their promises.

“When an asset manager, at its own discretion, lends support to initiatives like Climate Action 100+ or commits to becoming a Net Zero Asset Manager, that commitment must be substantive and meaningful. Regrettably, this isn't always the case,” wrote Geraldine Leegwater, chief investment management at PGGM and her colleague Colin Tissen, advisor responsible investment in a recent opinion piece for Net Zero Investor.

Leegwater and Tissen are not alone. Some pension funds in the US, for example the New York Board of Education Retirement System have set themselves net zero by 2040 targets and are now facing the challenge that asset managers can’t meet their ambitions just yet.

In the UK, the feeling of discontent has been so widespread that the UK Asset Owner Roundtable has commissioned a study into the alignment of voting behaviour between managers and owners.

“We have exercised our vote this year to address our concerns but when we looked at some of the actions from other shareholders in those companies, there didn’t seem to be a widespread level of support. There seems to be a misalignment between the way asset managers were voting and the asset owner community,” said Faith Ward, chair of the roundtable.

A question of timing

While the results of the roundtable’s research will be presented in mid-October, Morningstar’s Lindsey Stewart argues that one reason for the misalignment might be the different time horizons both sides are working with.

“It is important to remember that asset managers have the same kind of pressures as other companies to drive revenues and profits. We hear a lot about the short-term focus of corporations, but asset managers aren’t immune to these pressures. This is why we are seeing deviation between the priorities of asset owners that are not revenue- or profit focused organisations and have to think about the long-term benefits of their beneficiaries.”

In contrast: “Asset owners have members that are going to be in a scheme for multiple decades and they are thinking about the whole portfolio for multiple decades whereas asset managers are generally looking at companies over a three to five year period because that is the record  presented to you when you pick up a fund factsheet or when you go to pitch to a client. You can’t suddenly expect asset managers to get into this 20, 30, 40-year mentality. There is a bit of negotiation that needs to be had,” he adds.

Having said that, he also points out that asset owners still tend to measure managers based on short time frames. “If you are looking to appoint managers for a particular mandate you are not going to give them 20 to 30 years to fall in line with your wishes."

Early adopters

But asset owners are also playing a key role in the push for split voting. A case in point is Scottish Widows. The life insurance and pensions company has more than £188bn in assets, of which approximately £54bn in its default strategy, Pensions Investment Approaches.

It has formulated an in-house responsible investment strategy toolkit, which covers the default strategy as well as its £2bn master trust. But increasingly, it felt that it’s internal policies were not aligned with those of its managers.

With most of its assets being invested through BlackRock and State Street, Scottish Widows worked closely with both managers to set up a split voting mechanism, says Shipra Gupta, investments stewardship lead at Scottish Widows.

“While there are some aspects of these in-house policies that are good, they are trying to cater to a much larger audience. We have our own voting guidelines and then we map the policies that are available via voting choice and ensure that the one we choose is the closest to our voting guidelines,” she explains.

As a result, Scottish Widows can now override its managers. This year, it has already implemented this new function to its top 300 holdings, Gupta explains.

Onus on asset owners?

Tumelo's Georgia Stewart emphasises that to adopt options like split or pass through voting, funds would in the first place need a clear understanding of their own priorities. “Understanding what effective stewardship policies look like helps to compare not only how managers vote, but also what matters to asset owners. That's the ideal scenario. We don't want to take power away from asset managers just for the sake of it, but someone needs to take charge of these efforts. Asset owners are starting to see this as their responsibility,” she argues.

Meanwhile Gupta is optimistic that asset owners have a role to play in countering the anti-ESG backlash. “Like we say it is important to stay invested in companies to be better stewards, the same applies to asset managers. Some of these big asset managers are domiciled in the US, and it is our role as asset owners to be supporting and influencing them from Europe when they are hearing very different voices in the US, and to keep nudging them. 

"We want to decarbonise the economy, but if these asset managers do not engage and vote appropriately in Asia, the emerging markets and the US it doesn’t help anyone,” Gupta adds. 

But Leanne Clements, head of responsible investment at the People’s Partnership, provider of UK master trust the People’s Pension, makes the point that split voting shouldn’t mean that asset managers can abdicate themselves from their responsibilities. 

“As long as these big passive fund managers remain on the shareholder register, they still remain a systemically important engagement focus for asset owners like us with regards to their voting behaviour and notably voting escalation," Clements says.