The US Securities and Exchange Commission (SEC) is set to introduce a requirement for enhanced information and transparency of proxy votes by mutual funds and ETFs, prompting calls for the UK to follow suit.
As it stands, UK companies are legally required to include reporting of their ESG activities within annual reports, but UK-based index funds don’t have the same obligations.
“Helping asset owners easily check whether their chosen fund policies are actually being implemented by their index funds will help index fund managers better adhere to their stated objectives and, thereby, hold them to greater account,” says Gerry Brown, chairman of Novaquest Capital Management.
“It is hard to see how any index fund, tracker fund or exchange-traded fund – let alone executive board, company, industry, regulator or government department – could reasonably object to this proposal for greater transparency and accountability when it comes to the practice and execution of ESG responsibilities in the UK. Indeed, the requirement for all funds to publish their proxy voting records annually would quickly have a demonstrable, and possibly game-changing, impact upon the actual pursuit of ESG in the UK.”
What is the US doing?
The SEC is proposing to amend ‘Form N-PX’ under the Investment Company Act of 1940 to enhance the information mutual funds, exchange-traded funds, and certain other funds currently report annually about their proxy votes and to make that information easier to analyse.
As part of the changes, institutional investment managers would be required to report how they voted proxies relating to executive compensation matters on an annual basis via Form N-PX.
Legal adviser firm Sidley says that while the proposed rules might appear technical, they present “fundamental questions around the value of this kind of reporting”, and who should be required to report, as well as the level of detail.
“Would the new securities-on-loan reports affect securities lending markets, or would operational burdens associated with proxy voting – again, just tracking say-on-pay votes would be a challenge for some managers – affect the relationship between investment managers and clients?” the firm asks.
Follow the leader
Earlier this month, it was reported that Blackrock wrote to clients to confirm that institutional investors across certain index strategies would be given the option to choose how they take part in proxy voting, piling on the pressure for others to do the same.
“The issue of transparency, particularly around voting is something that regularly seems to come back to bite asset managers, and given that transparency and trust go hand in hand, it’s understandable to see why it’s possible to perceive that asset managers are not doing enough in this area,” explains Ryan Hughes, head of investment research at AJ Bell.
“Often criticism has been levied that asset managers have not done enough as shareholders to change behaviours in the companies they own on investors’ behalf and therefore the potential for enhanced disclosure in the UK around executive pay looks to have merit.”
He adds: “While enhanced reporting will go some way to help, without engagement from underlying investors, there is a risk it just becomes another report that gets filed away, unread by underlying investors.”
For Brown, should the UK follow the US’s lead and introduce similar enhanced reporting it would pave the way for a great leap forward in the pursuit of environment, social and corporate responsibilities.
“If the UK adopts similar categories to those proposed in the US, readily searchable records would enable anyone to quickly assess and easily establish if the fine publicly-stated ESG principles of company and industry mission statements were also based in action and deed when it comes to a wide variety of ESG matters,” he explains.
“Anyone would be able to quickly see how their fund, or a competitor fund, cast their proxy votes in the last year on any of the categories, for example in, say, ‘renewable energy’ to see how the fund in question voted [for example 58% in favour]. And, thereby, use this information to hold their funds to greater account, as well as actively review, enhance or exit their holdings on the basis of actual behaviour and action in specific ESG areas.”
The ESG report categories that Brown has suggested are ‘environment or climate’, ‘diversity, equity and inclusion’, ‘human rights’, and ‘political’.
These four areas would cover greenhouse gas emissions, biodiversity, chemical footprint, board diversity, pay gap, outsourcing or offshoring, sexual harassment in the workplace, lobbying, and political contributions, among others.
Brown adds: “The scope for influencing companies and industries via index funds to achieve ESG ambitions, goals and aims can only be beneficial for matching words with deeds when it comes to good corporate governance.”
