Stewardship’s Transatlantic Divide
New expectations, metrics and rules are making differences between European asset owners and US-based managers harder to ignore.
The value of stewardship to asset owners has become increasingly apparent over the past half-decade, driven partly by a desire to move beyond ‘paper decarbonisation’ of their portfolios.
But recent shifts in expectation and regulation – not to mention assets – suggest the market is accelerating along a path to that value being quantified, and eventually priced, more explicitly.
Those shifts may also be signalling divergence, with large US fund managers, especially the major index fund providers, facing higher hurdles to the provision of stewardship offerings with appeal beyond their borders.
Last month, asset owners worth US$1.5 trillion outlined climate stewardship guidance for managers, while one of their number pulled US$28 billion from State Street Global Advisors (SSgA), as the firm and peers Vanguard and BlackRock digested new rules that constrain their engagement activity.
The People’s Pension (TPP), the UK’s largest commercial trust, characterised the move from SSgA’s pooled funds to segregated accounts overseen by Amundi and Invesco as driven by a desire for greater control, and to work with managers demonstrating “greater alignment”.
“It’s a question of which potential provider is most aligned with what we’ve written down [in our responsible investment policy],” CIO Dan Mikulskis told a podcast.
The decision emerged after the Securities and Exchange Commission (SEC) imposed disclosure requirements on 5%-plus shareholders that seek to influence US issuers.
“It definitely makes the landscape harder for them to engage on ESG topics,” says James Moore, Partner at UK-based investment consultants LCP.
The rules could further widen the gap between stewardship expectations and delivery, leading asset owners to intensify monitoring – and to vote with their feet.
“I don’t think we’ve seen the last of it,” says Lindsey Stewart, Head of Stewardship at Morningstar Sustainalytics. “Asset owners across Europe and the UK are actively considering whether they are with the right managers to execute on their sustainability goals.”
Greater expectations
Asset owners outsource stewardship to varying degrees, exercising oversight in line with their legal obligations and responsible investment policies, getting more involved where resources and priorities allow.
Whether holding a stock in a segregated account, an actively-managed fund, or an index-led pooled vehicle (possibly all three), the asset owner aims to convey a consistent view to issuers via intermediaries.
But stewardship is not explicitly costed, partly because it is provided at the firm-wide not the strategy level.
Large index providers have made an extensive investment in stewardship; the sheer breadth and nature of their holdings means divestment and exclusion are less of an option.
BlackRock voted on almost 170,000 management and shareholder proposals globally in the year to end-June 2024. In addition, it engaged with almost 2,500 firms across five priority themes, including climate and natural capital.
The importance of stewardship has risen in step with the growing prioritisation of sustainability factors by asset owners, but the incorporation of either into selection criteria has been uneven.
“Clients pick fund managers for a host of different reasons. Historically, stewardship has been pretty low on the list,” says Georgia Stewart, CEO of pass-through voting fintech Tumelo.
A watershed came in 2023 when UK asset owners commissioned a report to explain a gap with largely US-based managers following a failed vote protesting BP for slashing its climate ambition without consultation.
Andreas Hoepner, Professor of Operational Risk, Banking and Finance at University College Dublin, identified potential causes of misalignment, including different perceptions on the role and execution of stewardship, the urgency of climate risk and potential conflicts of interest.
Hoepner recommended further research to explore other jurisdictions, resource challenges, mandate design, and the interaction of voting and engagement. He also proposed the development of the stewardship expectations statement delivered last month.
The statement calls for market- and policy-level stewardship, participation in collaborative initiatives, escalation processes within voting policies, appropriate resourcing, and an approach to engagement that “delivers maximum impact”.
While US managers may be hampered by the SEC’s new restrictions, this last request – which seeks to exercise scrutiny on climate commitments well beyond disclosure – is also at odds with a US view of stewardship that eschews micromanagement.
The principles are being adopted as part of increasingly rigorous manager oversight, according to Shipra Gupta, Investments Stewardship Lead at pension provider Scottish Widows, one of the statement’s co-authors.
“Our scorecard monitors our core manager activities and actions, and we conduct one-on-one meetings on all the criteria outlined in the statement,” she says, noting that improvements against the principles have been “varied”.
Stewardship plays a significant role in selection and monitoring, with Gupta’s team challenging managers where they see scope for improvement.
“We will continue to take appropriate action as necessary, bearing in mind that we have a seat on the table for engaging and influencing managers that will continue to remain amongst the largest shareholders in companies,” she adds.
Investment and innovation
Index fund providers have been in the front rank of innovation in response to client demand. They have invested in technology to enable retail and institutional investors to vote their shares, championing choice while shrinking from the anti-ESG spotlight.
Last November, Vanguard announced that investors representing US$250 billion across eight funds would be offered five policy options this year, including a third-party ‘wealth-focused’ approach which seeks to maximise shareholder value “without being influenced by political or social agendas”.
Since 2022, BlackRock has rolled out voting options across segregated managed accounts and pooled funds that use equity index and systematic active equity strategies. These options, which allow clients to mix and match their own policies, those of third parties, and the principles and priorities of BlackRock Investment Stewardship, are being exercised by around a fifth of eligible clients by AUM.
Stewart at Tumelo, which partnered with SSgA on its voting service to European retail investors, says the upsurge in demand has been notable over the last two years.
Technology made customisation inevitable, she says, but politics accelerated the trend. “Asset managers are in an impossible place and the only thing they can do is get out of the firing line,” says Stewart.
Their mantra, she suggests, is ‘our clients know what to do, so let’s let them do it’.
SSgA and BlackRock also offer bespoke stewardship options. Last July, BlackRock launched voting and engagement policies for clients and funds with explicit decarbonisation or climate-related investment objectives, representing US$190 billion.
NGOs have raised concerns that these opt-in innovations risk side-tracking the specialists that can hold high-emitting firms to account, potentially diluting the message to issuers.
“There are questions over whether decarbonisation-focused stewardship teams can deliver what they are offering, given they don’t represent the bulk of AUM,” says Jessye Waxman, Campaign Advisor at environmental group Sierra Club. “Will the institutions running them ensure they’re asking the right questions to encourage companies to take the steps needed to reduce climate risks?”
The products have been developed with and supported by asset owners. “This has been a great way to apply consistent voting action on our share of investments, aligned to our responsible investing approach and priorities, while also retaining our engagement capability with large passive managers,” says Gupta at Scottish Widows.
Rising expectations
According to LCP’s Moore, sustainability-focused clients are diving deep to determine manager alignment.
When advising on selection, LCP factors stewardship into a rating-based framework in several ways, including via stewardship-focused meetings with short-listed managers to identify potential weaknesses in their ability to drive ‘real-world’ change.
As well as interrogating the people, processes and policies that shape stewardship outcomes, asset owners can take account of firm-level impacts on key themes. They may, for example, consider the sheer heft of BlackRock’s sustainable and transition investing platform, which covers US$1 trillion in assets across 500+ strategies, including private markets.
But increasingly granular but holistic assessments of stewardship highlight fundamental differences. US managers’ stewardship approaches are highly focused on disclosure, while their UK and European clients expect real-world impact – and this split is becoming ever more apparent. Further, many argue voting and engagement must run in parallel to have optimal effect, suggesting managers cannot just ‘get out of the firing line’, by divesting vote responsibilities.
Responsible investment charity ShareAction’s latest research shows that a lack of support from the big three US index funds contributed to the lowest ever success rate for environmental and social resolutions at AGMs last year.
Overall, passive houses backed a third of resolutions. But while UK-based Legal & General Investment endorsed 90%, BlackRock, State Street and Vanguard supported 4%, 9% and 0% respectively.
While the fall in manager support has widely been attributed to last year’s proposals being overly prescriptive, this does not alone account for the scale of the recent drop-off.
“Stewardship works best when you have voting and engagement working together,” says Moore. “First and foremost, the asset owner is looking for a manager that is aligned with its investment beliefs and expectations.”
Alignment is also demonstrated by willingness to file resolutions, support thematic engagements, participate in policy advocacy and adopt a systemic risk focus. These are more challenging to pursue under the Trump administration, but some also go beyond prevailing US concepts of stewardship.
Vanguard’s stewardship activities focus on safeguarding long-term value and BlackRock’s view of its role as “better understanding” how investee firms manage risks and opportunities.
“As one of many minority shareholders, BlackRock cannot – and does not try to – direct a company’s strategy or its implementation,” says the firm’s stewardship principles.
A new era
Greater scrutiny of stewardship – from regulators as well as asset owners – is expected to lead to greater transparency on expectations and processes.
Some managers are thinking about how to measure the impact of their stewardship activities, potentially making it easier to compare services and outcomes.
TPP’s Mikulskis says it’s becoming easier to select aligned managers, but is cautious about turning stewardship into a numbers game.
“Getting your asset manager to get behind one vote could be the most impactful thing that you do over the course of five years, if it the voting share is over the threshold,” he said recently – although he admitted the need for “grown-up measures” for stewardship effectiveness.
Following his work for UK asset owners, Hoepner has been analysing the effectiveness of climate-related stewardship by monitoring the weighted average carbon intensity (WACI) of firms subject to engagement activity, finding that it typically declines faster than in cases where asset managers had ceased to maintain dialogue over their decarbonisation strategies.
“In the same way that we have a three-year track record for returns, we’ll have a three-year track record for stewardship impact fairly soon, because you can measure it for things like WACI, green capex or gender diversity,” says Hoepner who expects to finalise the research later this year.
Regulation could increase the need to understand the effectiveness of channels of influence. According to Hoepner, the SEC rule change for large shareholders offers issuers an opportunity to push back against investor scrutiny on topics they would rather not engage upon.
“There is a risk it will be used as a delaying tactic by issuers to evade investor control,” he says.
Lawyers are advising investor clients to carefully consider whether and how they wish to share their views on sustainability topics in stewardship meetings. If this is considered by issuers as exerting pressure, they could approach the SEC over an investor misfiling.
Noting also its guidance on shareholder resolutions, Morningstar’s Stewart says the SEC is ushering in “a new era” in US investor relationships.
“Even the largest asset managers are having to be cautious about what they say in meetings. It is likely to have a cooling effect on the amount of engagement between companies and investors,” he tells ESG Investor.
The expectation is that this could push Europe and the US further apart.
“Particularly in Europe, asset owners are looking for a reduction in long-term environmental and social risks, becoming quite intentional in their stewardship expectations,” says Stewart.
“Whereas there is a very wide range in the US, both in terms of levels of intention, and the way voting and engagement is executed.”
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