Responsible Investment Performance of UK Asset Managers. The 2015 ShareAction Survey

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1 Responsible Investment Performance of UK Asset Managers The 2015 ShareAction Survey

2 About ShareAction ShareAction is a UK registered charity promoting an investment system which serves savers, society and the environment. In particular, ShareAction works to encourage institutional investors to be active owners and responsible providers of financial capital to investee companies. Fairshare Educational Foundation (ShareAction) is a company limited by guarantee registered in England and Wales (number and registered address Ground Floor, 16 Crucifix Lane, London, SE1 3JW) and a registered charity (number ). Authors: Stefano Galdiolo and Camilla de Ste Croix Disclaimer This publication and related materials are not intended to provide and do not constitute financial or investment advice. ShareAction makes no representation regarding the advisability or suitability of investing in any particular company, investment fund or other vehicle or of using the services of any particular entity, asset manager or other service provider for the provision of investment services. A decision to use the services of any asset manager, or other entity should not be made in reliance on any of the statements set forth in this publication. Whilst every effort has been made to ensure the information in this publication is correct, ShareAction and its agents cannot guarantee its accuracy and they shall not be liable for any claims or losses of any nature in connection with information contained in this document, including (but not limited to) lost profits or punitive or consequential damages or claims in negligence. The research in this report was carried out between August 2014 and December During the period of analysis, the entities surveyed were informed of their interim scores by and were given the opportunity to comment on or ask questions on these to make additional disclosures or to provide clarification. All entities surveyed were given deadlines to notify ShareAction of their desire to discuss interim scores. Any notifications of changes, information or clarification not drawn to ShareAction s attention prior to the deadlines are not included in the report. Acknowledgments ShareAction gratefully acknowledges the financial support of the Nuffield Foundation for this project. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of ShareAction and not necessarily those of the Foundation. More information is available at

3 Contents UK Asset Manager Responsible Investment Ranking Executive Summary... 3 Introduction... 5 Methodology... 7 Key Findings... 8 Publicly Available Information... 9 Survey Results Conclusion Recommendations Appendices Appendix 1: Examples of Best Practice, Worst Practice and Successful Engagements Appendix 2: Individual Scorecards Appendix 3: Scoring Criteria

4 UK Asset Manager Responsible Investment Ranking 2015 Asset Manager Rank Score (Max 143) Threadneedle Asset Management Aviva Investors Jupiter Asset Management Hermes Investment Management Legal & General Investment Management TOP 5 Standard Life Investments F&C Investments Kames Capital Baillie Gifford & Co Schroders Investment Management Royal London Asset Management State Street Global Advisors BlackRock Henderson Global Investors Newton Investment Management AllianceBernstein Investec Asset Management HSBC Global Asset Management Capital International Artemis Investment Management JP Morgan Asset Management AXA Investment Managers Fidelity Worldwide Investments Invesco Perpetual First State Investments * Aberdeen Asset Management * Goldman Sachs Asset Management * Morgan Stanley Investment Management * BOTTOM 5 UBS Global Asset Management * M&G Investment Management * Santander Asset Management * J O Hambro Capital Management * Wellington Management * (*) Asset manager did not respond to the survey 2

5 Executive Summary ShareAction has examined and ranked the transparency and Responsible Investment (RI) practices of the 33 largest asset managers in the UK 1 for the fourth time, following surveys in 2007, 2008 and These surveys are the only independent benchmark of the asset management industry's RI performance in the UK. They are intended as a tool to identify and spread industry best practice and to aid clients of these firms in their evaluation and selection of providers. These 33 firms control 13.8 trillion of assets between them meaning they have significant power to influence the behaviour of the companies whose shares and bonds they hold in the UK and around the globe. Their behaviour is also increasingly important to the general public; automatic enrolment will create an estimated 9 million new pension savers by and the size of these savers pension pots will be heavily dependent on the net investment returns achieved by asset managers. This study sought to investigate whether these firms are behaving as responsible investors, addressing environmental, social and governance (ESG) issues with companies in order to better manage all risks and enhance the potential to create upside for their clients; if they are truly investing for the long-term when appropriate for client mandates, such as for pension funds; and if an increase in signatories to the UN's Principles for Responsible Investment (PRI) and the UK's Stewardship Code (the Code ) actually means that investment processes are changing in practice. The study examined all 33 asset managers on the basis of publicly available information and a survey that 24 of the firms completed. We found that all 33 firms are now publicly committed to stewardship and RI: 100% are signed up to the Code and all but 2 (Artemis Investment Management and Santander Asset Management UK Limited) are signatories to the PRI. 96% of survey respondents state that they conduct stewardship because they believe it affects investment returns. However the quality of RI and stewardship policies, practices and disclosures vary considerably between asset managers. This quality is not contingent on the size of the firm, or whether they are mainly active or passive managers. The E and S in ESG are still receiving less consideration than the G. Only 42% of the asset managers publicly disclose policies on how they incorporate environmental and social considerations into the investment process; qualitative analysis also suggests that the corporate governance issues still attract far more attention. By way of example, only 13% of survey respondents were able to disclose a robust strategy for managing the risks associated with stranded carbon assets. Although the Code operates on a comply or explain basis, many firms are failing to comply with the most fundamental aspects of the Code and the explanations for noncompliance are often weak, or nonexistent. For example, only 64% of asset managers publicly disclose a conflicts of interest policy, although this is a headline requirement of the Code, and conflicts of interest are a significant cause of detriment to clients and end beneficiaries. Of the 5 asset managers who do not disclose a conflicts of interest policy either publicly or indicate that they provide it to their clients, none provide an explanation for this. Another key aim of the Stewardship Code is to encourage collective engagement by investors. Although 94% of asset managers do have a policy on collective engagement, only 15% of these policies are robust, in that they explain both when and how collective engagements would be conducted. The Code also asks signatories to disclose whether they would be willing to become an insider, meaning to acquire non-public material information about a company which would legally restrict them from trading in that company s shares for a certain period. In order to fully engage with companies, investors may have to put themselves in a position where they acquire insider information but only 39% of the asset managers examined said publicly that they would be willing to take this step. Amongst asset managers who do report on their voting and engagement activities, the quality of these disclosures has improved; 64% now disclose detailed reports containing qualitative and quantitative information. In 2010 only 24% of the asset managers examined disclosed detailed voting reports. 64% also obtain independent evaluations of their 1 See methodology for details of the criteria used to select asset managers for inclusion. 2 Financial Services Consumer Panel, Investment Costs more than meets the eye,

6 voting and engagement processes. But a significant group of asset managers are still failing to disclose information on their voting and engagement activities and this has not improved in the last four years. 82% of the asset managers examined in this year s survey publicly disclose their voting records, compared with 83% of the cohort examined in The proportion of firms who publicly report on their engagement activities is also virtually unchanged. The application of RI strategies to fixed income assets is rapidly growing. 83% of survey respondents said that they now consider ESG factors in their analysis of fixed income portfolios and 38% of respondents said that the proportion of assets managed subject to ESG considerations has grown over the past three years. Another positive finding was that 96% of survey respondents now report to clients on the turnover of portfolios and 83% report on the costs associated with this. Turnover rates are an indicator of whether asset managers are investing for the long-term and, if turnover is high, may be a significant cause of costs to clients. 67% of respondents were able to articulate clearly how they adapt their investment approach according to clients different investment horizons. It seems that short-termism is still a problem in the UK s capital markets. Four years after its introduction, the Code has catalysed many improvements in the asset management industry. However, the voluntary approach has not led to any significant behaviour change amongst a substantial rump of asset managers. The Code has certainly increased acceptance of, and attention to, the idea of stewardship amongst asset managers and their institutional clients. Significant numbers of asset owners say they now take stewardship into account when selecting asset managers 3, meaning asset managers approach and disclosures around RI and stewardship will become increasingly important to their ability to win and retain clients. Firms doing this well will have a distinct commercial advantage in the marketplace in years to come and ShareAction predicts that these commercial pressures will continue to drive performance improvements. 4 3 For example, 80% of pension funds who responded to a recent survey by the National Association of Pension Funds: NAPF Engagement Survey: pension funds engagement with investee companies, 2014

7 Introduction ShareAction has undertaken annual benchmarking studies of the RI Performance and transparency of the UK s largest occupational pension funds, insurance companies and asset managers since These studies aim to promote industry and public understanding of RI and catalyse improvements by identifying both best practice and unsatisfactory performance. ShareAction s surveys are the only independent evaluation of asset managers RI performance in the UK and therefore a valuable resource for asset owners selecting and evaluating their managers. We evaluate the 33 largest asset managers who provide services to UK institutional clients and send the results to the UK s 100 largest pension funds and 40 largest charity investors. We were pleased that 24 firms provided responses to our survey despite the more rigorous nature of this year s questions, helping to ensure the validity of our findings. What is Responsible Investment? ShareAction promotes Responsible Investment by pension schemes and their asset managers. Responsible Investment is an investment approach which takes into account environmental, social and governance (ESG) issues which can be material to long-term investment returns. It requires these factors to be assessed and integrated into research and investment decisions and for investors to conduct active, considered voting of shareholdings and engagement with companies. These activities are fundamental to managing risk and maximising investment returns over the long-term, rather than optional extras. There is increasing recognition that the behaviour of asset managers matters not only for pension savers but also for the health of the economy as a whole, the environment and the actions of investee companies. When ShareAction first surveyed asset managers in 2008, the industry managed an estimated trillion of assets globally and PwC predicts this will rise to trillion by 2020, with growth in pension fund assets accounting for a large proportion of the increase 4. The assets under management of the firms included in this year s survey total 13.8 trillion. Automatic enrolment and the decline of company defined benefit (salary linked) pension schemes in the UK means that by 2018 over 12 million people in total could be members of defined contribution (DC) pension schemes 5. In DC schemes, there are no guarantees for members; the final pension pot depends on the level of contributions and the investment returns achieved by asset managers, net of charges. There is growing evidence that, although many savers often find the jargon surrounding investments offputting, they care deeply about where their money is going as well as about key RI topics such as executive pay, climate change and labour rights, as well as unethical practices by investors and investee companies 6. The introduction of the UK s Stewardship Code in 2010 made it clear that asset managers are well-positioned to influence companies long-term performance through stewardship and have a responsibility to do so 7. Also, the 2012 Kay Review of UK equity markets said: The asset management industry can benefit its customers savers taken as a whole, only to the extent that its activities improve the performance of companies..8 The Stewardship Code also says that asset owners, as providers of capital, set the tone for stewardship 9. Asset owners, in particular pension funds, are becoming more concerned about RI and stewardship; a recent survey by the National Association of Pension Funds of its members found that 80% take stewardship into account when selecting asset managers 10. This means that asset managers approach and disclosures around RI and stewardship will become increasingly important to their ability to win and retain clients. Firms doing this well will have a commercial advantage in the marketplace. ShareAction s last benchmarking survey of asset managers in , shortly after the introduction of the Code, found that the quality of 4 PwC, Asset Management 2020: A Brave New World, Financial Services Consumer Panel, Investment Costs more than meets the eye, See National Association of Pension Funds, What do pension scheme members expect of how their savings are invested?, 2014 and UK Sustainable Investment and Finance Association Attitudes to Ownership 2014, Financial Reporting Council, The UK Stewardship Code, 2012, p. 1 8 Kay, J., The Kay Review of UK Equity Markets and Long-Term Decision Making, Financial Reporting Council, The UK Stewardship Code, 2012, p National Association of Pension Funds, NAPF Engagement Survey: pension funds engagement with investee companies, FairPensions, Stewardship in the Spotlight: UK asset managers public disclosure practices on voting and engagement, 2010, available at 5

8 disclosures on stewardship policies and activities varied considerably between firms. A few firms used their statements of compliance with the Code or disclosures of voting and engagement activities to showcase their approach in an engaging way, positioning themselves as leaders in the marketplace. But many firms issued tick-box style statements, or did not cover all the areas outlined in the Code. Voting and engagement reports were often limited to information-dumps of reams of back office data, or summary statistics, lacking context or explanation to make the numbers meaningful. These shortcomings meant that firms genuine commitment to stewardship and accountability, and the results of these activities, were difficult to gauge. In this year s study, ShareAction sought to find out if, and how, asset managers disclosures on RI policies and performance had improved since This year s study also aimed to assess if asset managers are walking the walk as well as talking the talk. As public scrutiny and client interest in RI has grown there is a risk that asset managers are becoming more skilled at greenwashing or marketing their RI activities rather than improving the quality of activities themselves. This survey includes more detailed questions on how RI policies are developed, implemented and evaluated and, for the first time, includes analysis of RI practices in fixed income investment. 6

9 Methodology There are two sections to the study: an analysis of the information firms have made publicly available about their management of clients money and a survey examining asset managers RI practices. 33 asset management firms were selected for inclusion in this year s study. The 30 largest asset management firms offering equity and fixed income management services to institutional clients in the UK were selected based on data from the P&I/Towers Watson list of the world s 500 largest money managers and the IMA s data on total retail and institutional funds under management in the UK from April The survey also includes all asset managers included in the 2010 survey, taking into account two completed mergers and one firm no longer offering meaningful equity investment management services. The 2015 study was conducted in three stages. Firstly, ShareAction sent surveys to 33 asset managers to complete before a set deadline, although reasonable extensions were granted. Where asset managers gave no initial response to the invitations, additional efforts were made to contact them, including by and telephone. In the second stage, ShareAction undertook a review and analysis of the information publicly available for all 33 asset managers, namely their statements of compliance with the Code, published RI policies and voting and engagement records. This analysis of publicly available information was carried out between 15th September- 13th October Of the cohort of 33 asset managers, 24 provided responses to the questionnaire and are referred to in the report as survey respondents. The remaining nine firms were assessed solely on the basis of publicly available information. The report refers to asset managers when describing the total cohort of 33 firms. In the third stage, ShareAction reviewed and analysed the survey responses of the 24 firms who participated. At the end of this stage, draft scorecards were prepared and sent by to all 33 asset managers. ShareAction encouraged them to comment on the draft scorecards and this stage encompassed considerable interaction between asset managers and ShareAction through telephone calls and s. This interaction permitted asset managers to make ShareAction aware of additional disclosures and, where applicable, results were updated. Finally, reminder s were sent to asset managers who had not responded to the invitation to provide comments on the draft scorecards. If additional disclosures were made without notification to ShareAction after last updated draft scorecards had been sent to asset managers, then these will not be reflected in either the final scorecards or this report on the survey. The report includes individual recommendations for each asset manager, found on their scorecard. These recommendations are based on the publicly available information examined. Further recommendations are made to the 24 survey respondents. As these are based on confidential information supplied in their survey responses, these additional recommendations are made privately. 7

10 Key Findings Publicly Available Information All 33 asset managers are signatories to the Stewardship Code and 94% are signatories to the Principles for Responsible Investment, compared with 2010 when only 24 of the 29 asset managers included in the survey had issued formal statements of compliance with the Code. ShareAction reviewed the UK Stewardship Code compliance statements of each of the 33 Asset managers covered by the 2015 survey. The UK Stewardship Code is a set of guidelines released in 2010 by the Financial Reporting Council (FRC), and revised in September 2012, directed at asset owners and asset managers holding shares in UK companies. Its principal aim is to encourage these institutional investors to be active in their oversight of firms in the interests of their clients and beneficiaries. It was developed following a review of the governance failures which precipitated the 2008 financial crisis. The Code consists of 7 guiding Principles (each accompanied by specific guidance) concerning areas of good practice to which the FRC believes institutional investors should aspire. FCA regulated asset managers must either 'comply or explain'. The UK Stewardship Code Principles 1. Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities 2. Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed 3. Institutional investors should monitor their investee companies 4. Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities 5. Institutional investors should be willing to act collectively with other investors when appropriate 6. Institutional investors should have a clear policy on voting and disclosure of voting activity 7. Institutional investors should report periodically on their stewardship and voting activities Source: the UK Stewardship Code Environmental and Social considerations remain a low priority for the majority of asset managers. Although the Code still makes only a fleeting reference to environmental and social issues (in Principle 4) as these aspects are often sources of risk, it is still surprising that only 42% of asset managers covered by the 2015 survey publicly disclose policies on how they incorporate social and environmental considerations into their investment processes. This was judged by looking at Stewardship Code disclosures and RI policies. This represents only a modest improvement since 2010, when 34% of asset managers surveyed had disclosed a comprehensive policy on how they incorporate environmental and social issues into their investment process. We reiterate our recommendation that any future revisions to the Code should specifically require disclosure on how environmental, social and governance considerations are each integrated into processes for monitoring and engaging with investee companies. PRI The United Nations-backed Principles for Responsible Investment (PRI) initiative is an international network of investors working together to put its six Principles for Responsible Investment into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision-making and ownership practices. In implementing the Principles, signatories contribute to the development of a more sustainable global financial system. The six Principles are voluntary and aspirational, and as of January 2015, have been adopted by over 870 institutional investors globally. 36% of asset managers still do not publicly disclose their conflicts of interest policy. Although some of these firms say they disclose a policy to their clients, this is less than satisfactory given that the Code clearly states institutional investors should have, and publicly disclose, a robust conflicts of interest policy. Five firms neither disclose publicly nor state that they disclose to their clients and fail to provide an explanation for this. Furthermore, many of these policies cannot be considered robust as only 21% of the asset managers disclose actual procedures on how they manage conflicts of interests in relation to stewardship. ShareAction has long identified conflicts of interest in and around the investment chain as an obstacle to meeting the 8

11 best interests of clients and end beneficiaries of the asset management industry. It is disappointing that disclosure in this area is still lacking. Avivia Investors, JP Morgan Asset Management and Jupiter Asset Management all had particularly clear and comprehensive conflicts of interest policies 11. Out of the six asset managers invited to participate who are part of global diversified financial services groups where conflicts of interest are potentially most likely to arise and complex to resolve; only HSBC Global Asset Management and JP Morgan Asset Management provided responses. The non-respondents were Goldman Sachs Asset Management, Morgan Stanley Investment Management, UBS Global Asset Management and Santander Asset Management. Based on our analysis of the best policies, a comprehensive conflicts of interest policy should: Specify ways in which a conflict may arise in the particular organisation Specify the procedures in place for managing such conflicts, including: - rules on gifts and entertainment - internal staff training on conflicts of interest - maintenance of conflicts register - procedure for the voting of shares held in the manager s parent company - rules on personal account dealing by staff - disclosure to clients of conflicts of interest that cannot be managed - instructions for an independent third-party to make a voting decision when the conflict cannot be managed - Chinese Walls and other procedures to control the exchange of information Some of the weaker conflicts of interest policies only include information regarding conflicts that may arise during the exercise of proxy voting obligations, but not for engagement activities. Other statements of compliance with the Stewardship Code refer to a conflicts of interest policy elsewhere on the firm s website but we were unable to locate the policy despite thorough checking. It would be helpful for the FRC to publish a model conflicts of interest policy to speed up improvements in this key area. It is advisable for firms to include the description of their policy in their statement of compliance with the Code. Understanding when and how investors escalate their stewardship activities is crucial to understanding the overall stewardship approach, but there are many laggards in this area. The Code plainly states that institutional investors should have clear guidelines on escalation of their stewardship activities when investee companies do not respond constructively to an initial approach. Although the Code sets out clear guidelines for the types of escalation approaches investors can use, only 64% of asset managers clearly disclose how and 42% when they would escalate stewardship activities. Stewardship Escalation Policies Clear Guidelines on How to Escalate Clear Guidelines on When to Escalate 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Although 94% of asset managers have a collective engagement policy, only 15% can be considered robust in that they clearly explain when and how collective engagements are conducted. Royal London Asset Management, F&C Investments and Aviva Investments had particularly good collective engagement policies in this regard 12. The Code recognises that in some circumstances collaboration between investors is important, or essential, for achieving engagement aims. Some firms policies were extremely vague, making it difficult to gauge genuine willingness, for example: [The Asset Manager] formally acts in conjunction with other investors relatively rarely, but we are prepared to do so where such engagement appears necessary in order to materially enhance portfolio values and where we can do so in a manner that is in full compliance with applicable laws, regulations and judicial precedents with reference to such status. 11 See Appendix 1 for examples of best in class policies. 12 See Appendix 1 for examples of best in class policies. 9

12 Best-in-class collective engagement policies include clear explanations of: The rationale for conducting collective engagement and benefit to clients of doing so The networks and fora that the firms participate in The circumstances under which the asset manager would engage collectively How they work with other investors in the event of a collective engagement The quality of reporting on voting and engagement activities has improved amongst the asset managers who do report, but the proportion of firms failing to report has not improved since % of asset managers disclose their policy on voting shares and 64% disclose engagement and voting reports containing both qualitative and quantitative information. The best examples of voting and engagement reports came from F&C Investments, Jupiter Asset Management, Legal and General Investment Management, Standard Life Investments, State Street Global Advisors, Investec Asset Management and Henderson Global Investors. This represents a meaningful improvement compared with 2010, when only 24% of asset managers surveyed by ShareAction had disclosed detailed voting reports. However, 18% of the 33 asset managers still do not disclose any voting records at all, compared with 17% of the 29 asset managers surveyed in The voluntary approach has worked for most asset managers but a hard core refuse to be transparent and accountable. This suggests that the time has come to regulate. It is recommended that the government exercises its reserve powers to make meaningful public disclosures on voting of shares mandatory for institutional investors. The quality of engagement and voting disclosure varies greatly between asset managers, ranging from summary data of limited informative value to resolution-by-resolution voting records with their supporting rationale. Although the Code has resulted in more transparency and large quantities of voting information entering the public domain, it is now clear that this information is of limited value without context and explanation. The FRC should update the Code to specify that voting disclosures include qualitative information to contextualise statistics. In terms of voting policies, the leading examples were from Aviva Investors, Capital International and Royal London Asset Management. A significant minority of asset managers who are signatories to the Code are failing to either comply or explain on some of the most basic requirements of the Code. 27% do not provide details of a named individual to contact for further information or to pursue collective engagement opportunities. 30% had not updated their policy within the last year. Although the Code operates on a comply or explain basis, we found that generally where asset managers do not comply with certain Principles of the Code, no proper explanation is provided. In general, with the policies disclosed there is a wide range of quality in terms of the level of detail and the extent to which it seems that investment teams can override them at their discretion. Interestingly, analysis of the publicly available stewardship compliance statements in conjunction with the responses to ShareAction s questionnaire revealed that sometimes firms do comply with the elements of the Code, but fail to disclose this. For example only 61% of the 33 asset managers disclose publicly whether they would be willing to become an insider 13, 39% say publicly that they would be willing, but 75% of survey respondents said that they had become an insider within the last three years. Where asset managers are conducting stewardship activities but failing to properly disclose this it puts their commitment to transparency and the spirit of the Stewardship Code in doubt. It also makes it difficult for their clients and prospective clients to compare asset management firms and make informed judgements. Willingness to Become Insiders Publicly Disclosed Disclosed in Survey Response 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% * the first bar refers to the % of the 33 asset managers included in the survey and the second bar refers to the % of the 24 survey respondents When investors acquire non-public material information about a company, that can affect the share price, they are deemed to be insiders and are legally restricted from trading in the shares for a certain amount of time. In order to fully engage with a company investors may have to put themselves in a position where they acquire insider information, so willingness to become an insider indicates whether an asset manager is willing to exploit a full range of asset management engagement tools.

13 Survey Results In this year s study ShareAction sought to understand whether published policies on stewardship and RI are actually being put into practice throughout asset management firms, or whether investment approaches are largely unchanged despite these public statements. To do this the survey asked for details around the procedures asset managers have for putting policies into practice, concrete examples of activities undertaken and the rationale for these activities. Whether or not asset managers believe conducting stewardship is financially beneficial is a good indication of the depth of commitment to this approach. Encouragingly, 96% of the survey respondents stated that they conduct stewardship activities because they believe it affects investment returns. Explanation of Motivations and Commitment to Stewardship Because of Environmental, Social or Macroeconomic Benefits Because of Financial Return Optimisation Because of Duty of Care or Client Requirements 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Having a clear, robust process for research and monitoring investee companies is perhaps the most basic element of conducting stewardship, and an indication that asset managers are behaving as investors, concerned with company strategy and actions rather than as traders concerned primarily with the behaviour of other market participants 14. Most survey respondents were able to demonstrate this. When asked to describe their approach, 79% of survey respondents mentioned that they use a range of internal and external data sources and that they have direct contact with investee companies. Consideration of environmental, social or corporate governance (ESG) factors in the investment process is the most widely used method for undertaking RI. 96% of survey respondents indicated that they analyse and give proactive consideration to ESG factors in their investment decisions and 92% are prepared to engage directly with investee companies on ESG issues. This is encouraging. Despite signing the Code, two respondents said they do not engage directly with companies on ESG issues. Ethical and Thematic Investing Approaches The range of processes and activities used continues to evolve to reflect changing RI best practice. Overall, the procedures for researching, analysing and monitoring of investee companies have become more structured and comprehensive, with 83% of survey respondents involving RI specialists in the process. Negative Screening, used by 58% of survey respondents, is far more common than Best-in-Class screening, used by 25%, or thematic investment, used by 33%. Respondents who use negative screening were asked to describe the screening criteria. Exclusion of cluster munitions and other arms manufacturers was most commonly cited. Excluding arms manufacturers or for example, tobacco or alcohol producers, is usually carried out at the request of clients due to ethical concerns or to comply with international agreements. It is not the result of an analysis which concludes that these investments represent a financially material risk to the portfolio. 14 The Kay Review, for example makes the distinction among asset managers between those who invest on the basis of their understanding of the fundamental value of the company and those who trade based on their expectations of likely short term movements in share price. While some trading is necessary to assist the provision of liquidity to investors, current levels of trading activity exceed those necessary to support the core purposes of equity markets (See Kay, J., The Kay Review of UK Equity Markets and Long-Term Decision Making, 2012, p.11 11

14 Responsible Investment Approaches and Tools Used Thematic Investment Direct Engagement on ESG Issues Best-in-class Screening Negative Screening Consideration of Governance Factors in Analysis Consideration of Social Factors in Analysis Consideration of Environmental Factors in Analysis Involvement of SRI Specialist 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ShareAction has heard criticisms that RI teams or analysts can be siloed within asset management organisations, meaning their research and recommendations do not actually affect investment decisions. Encouragingly, 83% of survey respondents could describe how RI specialists work with internal stakeholders, such as portfolio managers. However many firms, in their public disclosures or survey responses, indicate that final discretion for investment decisions rests with portfolio managers meaning it is difficult to gauge the extent to which RI considerations influence the actual investment process. Resource constraints are cited as a barrier to conducting stewardship activities for 83%. These resource restraints include a lack of budget, time or adequately skilled personnel to carry out the work. Many respondents also mentioned that they hold shares in several thousand companies so cannot possibly engage with them all or that it is logistically difficult and costly to engage with companies overseas. The following barriers to conducting more and deeper engagement were cited by at least one asset manager: Challenges and costs in obtaining adequate corporate access Regulatory uncertainty on corporate access Lack of demand by clients Lack of receptiveness to engagement by investee companies Firms are trying to make reporting to clients useful and engaging but communicating outcomes remains challenging. Our analysis of publicly available data found that information on voting and engagement activities is sometimes of limited value as it lacks detail or context. However, 83% of survey respondents said that they disclose additional information to their clients compared with what they disclose publicly. Based on respondent descriptions of how and what they report to clients, the following best practice features were identified: Providing information on outcomes Providing information on next steps Disclosing the scale of opposition from other shareholders, in the case of voting activities Discussing trends and broader context, for example public policy developments Including case studies Tailoring reports for different clients Meeting clients face to face to discuss results Tailoring reports according to clients different investment horizons Avoiding jargon, for example by following the Plain English Campaign s 15 guidelines In general, public disclosures focus on inputs (number and type of engagement and voting activities) rather than outputs (result and impact from such activities). There are limited methods and metrics currently available for measuring the results of these activities but ShareAction predicts this will be a key area for development in the field of RI over the next few years. Communicating the results of these activities is essential for allowing clients to judge the value of the asset manager s investment approach, and for securing more resources for conducting stewardship. 15 For more information see 12

15 All but one survey respondent was able to clearly articulate an example of a successful engagement, showing that results can be communicated succinctly. 13 out of the 24 respondents cited engagements on governance issues, for example executive remuneration, board composition or structure and succession planning 16. All but one survey respondent said that they conduct proactive stewardship activities. Conducting proactive activities, rather than responding to events, shows a depth of commitment to stewardship and acknowledgment of its potential to create upside as well as mitigating risks. These activities include: Thematic engagement programmes, for example on animal welfare or cyber security strategies Identifying industry best practice and encouraging investee companies to adopt it, for example how best to minimise emissions and impacts on communities in the extractives sector Building relationships with investee companies senior management teams, so that these relationships can be drawn on if issues arise in the future Encouraging companies to develop robust board succession procedures so that these are in place before a restructuring or new appointment is required Encouraging companies to improve transparency and conduct better reporting, including of environmental impacts, bribery and corruption or by adopting integrated reporting. Several respondents mentioned asking companies to report their carbon emissions via the Carbon Disclosure Project s investor letters The use of proprietary metrics to identify companies in the portfolio with the highest ESG risks and engaging to mitigate these risks Challenging boards on their lack of gender diversity E and S are still getting minimal attention compared to G. The analysis of publicly available data showed that asset managers still give most attention to governance issues out of ESG factors. A qualitative analysis of the survey responses, including the examples of engagements that respondents cited, confirms this trend. Only 17% of survey respondents said they would be willing to attend a company AGM to engage on an environmental issue, 29% for workforce issues such as pay, safety or labour relations and 13% for wider social issues. A further indication that environmental risks are not receiving attention is that only 13% of survey respondents were able to disclose a clear strategy for managing the risks associated with stranded carbon assets. The theory of stranded carbon assets is gaining mainstream acceptance; the Bank of England announced an inquiry into the topic in late Stranded Carbon Assets Risks Robust Strategy Exists Some Consideration Given No Firm-Wide Strategy 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 16 See Appendix 1 for examples of engagements considered successful by respondents. 17 see 13

16 Investment horizons The 2012 Kay Review of UK Equity Markets and Long Term Decision Making found that short-termism is a problem in UK equity markets for both the performance of UK investee companies and beneficiaries of the investment industry. This problem is particularly pertinent in the case of pension funds which are by definition longterm investment vehicles. It is, therefore, concerning that 33% of survey respondents were unable to articulate clearly how they adapt their investment approach according to clients different investment horizons. Portfolio turnover rates can be used as an indication of the propensity of asset managers to genuinely execute longterm strategies in accordance with investment mandates. In response to client requirements, 96% of survey respondents report on the turnover of their portfolios and 83% report also on the costs incurred through such turnover. However, a best-in class long-term investment approach does not just entail holding investments for a long time. It also entails engaging with companies to improve their performance and risk management, the benefits of which may only be realised over the medium to long-term. 63% of survey respondents did indicate that they adapt their client reporting depending on the investment horizon, but only 29% appear to do this in a structured and comprehensive way which would allow clients to contextualise the information contained in the reports. Development of Responsible Investment Policies As RI best practice is evolving rapidly, asset managers should continually seek to evaluate and update their RI policies and procedures. Indeed the FRC s guidance in the Code states signatories are encouraged to review their policy statements annually % of survey respondents were able to provide a meaningful description of how their RI approach has been reviewed and updated since its inception. The process of developing and updating RI policies has evolved and now often includes contributions from different stakeholders. The survey responses confirm the trend witnessed elsewhere in financial services that complex tasks require a multidisciplinary approach in order to be accomplished effectively. The process of developing RI policies may involve not just in-house RI specialists (92%), and dedicated committees (71%) but also Portfolio Managers (83%), Legal Advisors (33%), C- level executives (83%) and clients (25%). ShareAction often hears that asset managers must execute on the mandates they ve been given from clients and cannot diverge from these instructions. As such it is disappointing that only a quarter of respondents say they consult with clients when developing their RI policies. Contributing to Development of Responsible Investment Policies Clients C-Level Executives Legal Advisors Portfolio Managers Dedicated Committees In-house Responsible Investment Specialist 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 18 Financial Reporting Council, The UK Stewardship Code, 2012, p.3 14

17 Fixed Income Asset managers of fixed income strategies have the potential to make greater use of engagement tools at their disposal to pursue ESG objectives. There is a growing recognition amongst asset managers that investors in corporate and government debt can and should incorporate consideration of ESG factors into their investment decisions. 83% of survey respondents indicated that ESG considerations do feature in the analysis of their fixed income portfolios. 65% of these said that over 50% of their fixed income assets are managed on this basis and 17% said that all fixed income assets are managed in this way. This is a rapidly evolving area; 38% of survey respondents said that the proportion of assets managed subject to ESG considerations has grown by over 10% over the past three years. ShareAction welcomes this development and hopes that those asset managers with room for further improvement in this regard can be inspired by their best-in-class peers; their clients will increasingly expect it from them in the future. Percentage of Firm s Fixed Income Assets Managed Subject to ESG Considerations Over 50% Between 5% and 50% Under 5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ShareAction's analysis indicates that there is still a strong belief amongst managers of fixed income strategies that the ability to influence change in corporate strategy and behaviour remains the preserve of equity investors alone. Although the range of engagement tools available to fixed income investors is more limited than in the equity arena, the ability to rely on affordable debt funding is critical for many investee companies. This does afford to fixed income investors some leverage to engage with investee companies on ESG topics. One survey respondent reported that its fixed income and equity investment teams work regularly together, for example holding joint meetings with clients, across a range of areas including ESG issues. ShareAction recognises the barriers preventing better practice in this area. Asset managers should review their operational practices given that the missed opportunity to maximise positive ESG-relevant impact through an integrated fixed income-equity investment approach may at times translate into a loss of incremental investment return. Remuneration practices Excessive risk taking by investment professionals in the run up to the financial crisis, fuelled by compensation cultures rewarding short-term success, have been widely criticised. The short-term nature of judging and rewarding investment performance can also be a driver of damaging misalignment between asset managers and asset owners cited in the Kay Review % of respondents reported that portfolio managers compensation structures have been amended in the last five years. 88% of respondents report that there is a variable component to portfolio managers compensation and 42% said that ESG related criteria are incorporated into the calculation of this component. 71% of respondents report that bonuses are deferred for between 2-5 years, and two respondents say that a portion of the bonus is deferred for over five years. We would encourage clients to probe for detail on this. 19 Kay Review, page 9 15

18 Factors Taken into Account in Calculation of Variable Component of PM s Compensation Approval of Remuneration Policies and Variable Compensation Pay-outs Fund Performance Value of Assets Qualitative Indicators Incorporation of ESG Criteria Level of Client Service Provided Third Party Reviews of AM s Compensation Trends Other Pay-outs by Senior Management or Board of Directors Pay-outs by Remuneration Committee Policy - by Senior Management or Board of Directors Policy - by Remuneration Committee 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% However, improvement on transparency around pay design in the asset management sector still leaves quite considerable room for improvement. Only 67% of survey respondents are prepared to disclose such design to their clients, and only one would also be prepared to disclose the quantum if requested by clients. It is positive that both the relevant policies and the actual variable compensation payments are predominantly approved at Senior Management or Board of Directors level, and therefore approval rests outside portfolio managers teams or division. 16

19 Conclusion ShareAction s fourth benchmarking survey of asset managers is the most comprehensive to date in terms of the number of participants and the assessment criteria. We hope our findings will be a valuable tool for asset managers to assess themselves against their peers and indeed for their clients. In the four years since its introduction, the UK Stewardship Code has catalysed improvements in the policies, practices and transparency of many asset managers and an acceptance of the concept of stewardship. Best practice is evolving rapidly as evidenced by the quality of voting and engagement disclosures, which the industry leaders show can be engaging and informative. The survey responses revealed a range of innovative engagements that asset managers are conducting with investee companies. The growing application of RI to fixed income is also encouraging. There is however, a wide variation in the quality and quantity of stewardship between the leaders and the laggards. Disappointingly, in the four years since our last survey there has been no meaningful improvement amongst the laggards. A significant minority of the industry is still failing to provide evidence of their voting and engagement activities. The failure of some firms to comply with some integral elements of the Code, or to provide explanations for non-compliance, shows that a voluntary approach is not sufficient to bring about universal accountability in this important industry. There is much room for improvement even amongst the leaders. Environmental and social considerations are not getting sufficient attention from asset managers despite the fact that they can have a meaningful impact on returns. Overall, the industry still seems to understand RI mainly as engaging with companies on governance issues. It is concerning that so few respondents have a strategy for managing the risks associated with stranded carbon assets. An examination of the leaders and laggards shows that size is not a barrier to conducting good stewardship and RI; some of the smaller firms scored the best. RI and stewardship related headcount is a small fraction of a firm s total workforce, meaning that resources for these functions can be increased significantly without substantially impacting overall staffing cost. These results also show that managing all or mostly passive mandates is not a barrier to effective stewardship and RI. Conflicts of interest, a reticence to engage collectively and short-termism still seem to be widespread features of the asset management industry which are likely to cause detriment to the UK s savers. Given the growing size of the asset management industry and its importance not just to the economy but to increasing numbers of savers, a more demanding regulatory approach is justified. The institutional clients of asset management firms should feel emboldened to hold them to account and set demanding mandates including requesting that asset managers properly resource their RI teams and capabilities. 17

20 Recommendations Recommendations for Asset Managers: Asset managers covered by the 2015 survey will be able to benchmark the performance of their various RI activities against those of peers. Individual scorecards appended to this report set out specific recommendations for each of the asset managers based on public information analysed as part of the survey. Additional recommendations based on the analysis of non-public information provided in survey responses are also given individually to survey respondents. General recommendations can be made to the asset management sector on some key topics. We suggest that managers: Give more extensive consideration to Environmental and Social issues in the analysis and management of equity and fixed income investments and provide disclosure on this Consider greater integration of investment analysis, management and engagement functions across the equity and fixed income asset classes, and provide disclosure on this Develop and articulate clearer guidelines and procedures on when and how to escalate stewardship activities Consult with clients when developing and updating RI policies Review the adequacy of existing incentives to achieve RI objectives Recommendations for Policymakers and Regulators: A number of barriers still exist to the disclosure by asset managers of data which would allow clients and other stakeholders to better understand the relative and absolute RI performance of asset managers. The government and the FRC can perform important roles by removing certain barriers and ShareAction makes a number of recommendations in this respect: The government should exercise its reserve powers to make public disclosures on voting of shares mandatory for institutional investors The government and regulatory authorities should work closely together to address the issues arising from inappropriate management by investors of environmental risks The FRC should update the Code to encourage voting disclosures that include qualitative information to contextualise statistics The FRC should publish at least an outline specimen policy, with guidance notes, on conflicts of interest to counter the provision of weak statements The FRC should update the Code, giving greater emphasis to the management of environmental and social issues by investors Disclose the extent to which portfolio managers are bound to abide by RI and ESG related policies and procedures In its upcoming review of the Code, the FRC should strictly monitor compliance. Serious cases of non-compliance should be referred to the Financial Conduct Authority and firms should be prevented from saying that they are signatories until they have made necessary changes. 18