How can good operational governance increase efficiencies?
, Pippa Rudling
Helping institutional investors implement Shareholder Rights Directive II
The one certainty about the investment management industry is that new regulations will arise and existing ones will continue to evolve. Complying with them, and building them into existing investment management processes, is an ongoing challenge for all parties. Right now, many UK trustees and consultants are dealing with the consequences of Shareholder Rights Directive II (SRD2).
SRD2 comes fully into force on 1 October 2020 but planning for, and implementing, the various mandated changes started in 2019. We won’t go into details here, but instead will highlight two issues arising from the regulations relating to significant votes and split voting. First, let’s consider why these new regulations are good for institutional investors concerned about Environmental, Social and Governance (ESG) issues.
The new regulations aim to encourage investors to take a longer-term view with their investment strategies. They will also increase transparency between investors and companies by making it clear how institutional investors are voting and who is behind significant votes. For trustees, that will mean making their Statement of Investment Principles (SIP) public and detailing how they are implementing their engagement policies in an annual report.
The Department for Work and Pensions has already said that pension schemes must state in their SIP how they are tackling ESG issues. Now the SRD2 implementation statement will have to include voting behaviour, specifically ‘significant votes cast by or on behalf of trustees’ – and many of them will be ESG related. The implementation statement will also reveal whether the scheme has invested through segregated mandates, pooled funds or other vehicles and detail the use of any proxy voter services.
Many institutional investors might consider this increased focus on ESG issues as good news from a risk management point of view. However, this transparency is also likely to increase public scrutiny of votes concerning ESG issues. That’s because it’s not just regulations driving the ESG and Stewardship debate.
Attitudes in society, and specifically among younger investors, are changing. People increasingly see their investments as a tool for influencing corporate behaviour. At the same time, many organisations now want their pension schemes to align more closely with their brand values.
Active investment, when done well, can lead to improved outcomes for everyone. It can encourage companies to improve their contribution to society and reduce their environmental footprint. It can also lead to businesses being better run and so generating higher returns for investors.
However, the challenge for many trustees is one of Stewardship. How do you use your shareholder power to change ESG attitudes at investee companies? You need significant resources and expertise to engage effectively with investee companies and to hold them to account at shareholder meetings.
Large local authority and corporate pension schemes can use their buying power to negotiate lower fees, which leaves them with more resources to devote to their shareholder responsibilities. However, many smaller pension schemes are not so fortunate and cannot afford a dedicated stewardship function. The alternative is to leave active voting to individual fund managers.
Many large asset managers take those responsibilities seriously but they can’t always tailor their actions to the individual needs of their pension clients, particularly those in pooled funds. That makes it harder for trustees to answer the concerns of the companies they represent and their schemes’ beneficiaries. It’s particularly a problem if ‘significant votes’ cast on their behalf don’t match the aspirations of their SIP.
This is where trustees with segregated mandates can benefit from entrusting their votes to an expert third-party stewardship provider, with a proven record of active engagement. However, most pooled funds lack the structure to allow investors to vote separately.
AMX is an open-architecture platform, which enables us to work with multiple service providers, depending on client preference. We currently offer an engagement overlay managed by EOS by Federated Hermes on some of our equity funds and – with the support of First Actuarial – are in the process of launching a passive global equity fund with an independent voting overlay provided by PIRC. We build our funds from the ground up, ensuring they have efficient structures that meet the needs of our clients.
One example of this is our global equity enhanced stewardship fund, which will make it easier for asset owners to comply with SRD2. The AMX-CCF-SSGA Global Equity Index Fund combines strong governance oversight from AMX, efficient index tracking by State Street Global Investors, robust custody and asset safeguarding by Northern Trust, and an independent voting and engagement overlay provided by PIRC.
Reporting of significant votes cast might normally be included with quarterly statements and may vary in time and format by provider. However, AMX’s portal – AMXConnect – centralises and automates all fund reporting, including stewardship research and voting records. Research can be uploaded directly to the portal, in as close to real-time as possible for all investors in the fund.
PIRC’s voting services cover the full range of ESG issues including promoting sound governance, effective responses to climate change and good employment practices. Due to the scale of AMX, the AMX fund should be lower cost than a typical passive global equity fund used by private sector pension schemes.
At AMX we are constantly innovating and developing new solutions for our clients. If you would like to know more about this fund, or how AMX can create bespoke investment solutions for your clients, please get in touch.
Photo credit: Paul Sheehan
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