The move towards “investor choice” stewardship and voting programs is gaining speed and scale as a result of politics, technology and a desire from large asset managers to stay out of the limelight. The pass through of stewardship options from managers to asset owner clients creates new decision points that can ultimately enable asset owners to have a voice further down the investment chain.
“Investor choice”: what is it?
Investor choice programs can have two components: tailored proxy voting in pooled funds and tailored engagement. Pass-through voting allows asset owners to choose across a spectrum of voting policies how their shares in pooled funds should be voted at annual general meetings. Previously, investors had to be invested in separately managed accounts to access customised voting – what was once an option mainly to large institutional investors is now becoming available to smaller institutional and retail investors.
Global asset managers such as BlackRock, Vanguard, State Street Global Advisors, Northern Trust and LGIM, have expanded access to voting choice programs and engagement across their index equity assets. Approximately $3.63 trillion of BlackRock index equity assets, $3.6 trillion of Vanguard equity index fund assets and $2.2 trillion of State Street index equity assets are now eligible for some form of investor voting choice. Those programs are available institutional investors in a growing number of countries, including Canada, the US, the UK and in Europe.
Why will asset owners need to “choose” more often?
While the movement for asset owner choice gained momentum in the 2010’s, the politicisation of ESG in the US further accelerated the deployment of this service by the largest, US-headquartered, global managers. Investor choice enables managers to step back from acting as centralized stewards and to reposition themselves as neutral infrastructure providers. Whereas institutional asset owners in specific pooled funds formally had to accept a manager’s benchmark voting guidelines, they can now select a voting policy that suits them best (e.g., 4 at Northern Trust, 17 at BlackRock) for an expanding range of pooled funds.
At the same time, proxy advisors, another important force in the stewardship ecosystem, are also shifting away from the use of standard “benchmark” voting policies. For instance, starting in 2027, Glass Lewis will shift away from using house/benchmark voting guidelines in their issuance of voting recommendations and move toward customised voting recommendations for each client.
Asset managers (e.g., SSGA) and proxy advisors (e.g., Glass Lewis) also point to the improvements in technology as a key enabler for investor choice.
Now that this infrastructure has been set up, large asset managers are advocating for other jurisdictions to facilitate investor choice, as recently observed in the European Sustainable Finance Disclosure Regulation (SFDR) and Shareholder Rights Directive (SRD) consultations (the CWC also submitted responses to both consultations). For instance, Vanguard’s SRD response explicitly argued against a “one-size-fits-all” approach to proxy voting and highlighted the role regulation could play in enabling the broader expansion of investor choice models.
Why does this matter for pension trustees and asset owners?
The move toward more investor choice will impact trustees and funds of different sizes to varying degrees.
Trustees at large funds are likelier to have their own proxy voting guidelines and are likelier to use separately managed accounts to the extent that they use external asset managers. While those funds may already be asking their asset managers or proxy advisors to follow their own guidelines, they should closely monitor two things: 1) the extent to which their service providers follow their guidelines by reviewing voting on strategic key votes and 2) their asset managers’ benchmark voting practices to understand an asset manager’s “house” view on issues of importance (e.g., labour rights, climate change) to the asset owners. In a scenario where larger asset owners relied heavily on proxy advisors’ benchmark policies to inform their own policy, the Glass Lewis decision to end its standard policy in 2027 will require funds and their boards to make decisions on the direction of their proxy voting policy.
Trustees at medium and smaller funds are more likely to invest in pooled funds and less likely to have their own proxy voting guidelines. Moreover, those funds tend to rely on smaller teams of investment staff (if any) and are likelier to be constrained when it comes to educating themselves on investor choice. Medium and smaller funds should review if any of their asset managers have investor choice programs. Where those programs are available, trustee boards could ensure that they select the voting policy that aligns with their investment beliefs.
The result is that asset owners can now have a more meaningful voice in markets. Their collective decisions – adopting pro-worker vs. adopting a pro corporate board policy – could impact votes for or against corporate directors or shareholder resolutions.
At a time when shareholder democracy and voice is losing ground at the expense of corporate power, asset owners should seize the opportunity to be the direct messengers to portfolio companies.
By: Hugues Létourneau, Director & Maria Claudia Orozco, Senior Program Officer
INTERESTED IN LEARNING MORE?
The CWC is convening a roundtable in mid-November for asset owner representatives seeking to better understand the evolving proxy choice landscape, including the opportunities, limitations, and practical governance considerations it presents.
Pension fund representatives (trustees and staff) and other asset owners are invited to fill out this form to express their interest in participating.
