Proxy voting will increase the leverage impact of ESG on retirement provision
Increased attention to proxy voting could create a backdoor for ESG investments for retirement plan participants.
With only 3% of 401 (k) plans currently offering investments that are classified as environmental, social, and governmental, most retail investors cannot establish themselves in the popular sustainable investing space.
However, as investor advocates and regulators increase pressure for simpler and more transparent proxy voting procedures, it is possible that retail investors can have a significant impact on the way fund companies currently vote on shareholder proposals.
While the basic mechanisms of annual proxy voting are still far from the user-friendly transparency that most retirement plan participants would bring, a Morningstar report on Tuesday described proxy voting as the “sleeping giant” of ESG investments.
“We suggest that proxy voting needs to be made more visible so that it becomes a decision point for investors,” said Jackie Cook, director of stewardship research at Morningstar.
Mutual fund investors, as indirect investors, do not directly own shares in a listed company within a fund and are not allowed to vote for proposals from shareholders. However, you can keep track of how their mutual funds and mutual fund companies are voting.
Since investment funds act as proxies on behalf of fund investors, they are obliged to represent the interests of their investors when voting at general meetings. In the case of passive investment strategies, proxy voting becomes even more important, since a sale is less of an option.
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“The best place to start is to look at the asset manager, as research shows the house view prevails and this gives an idea of how they are voting for the underlying funds,” Cook said.
For example, the Fidelity Investments funds recommended by Geode Capital Management supported nearly 90% of key ESG resolutions, while Fidelity’s FMR-managed funds supported around 50% of the resolutions, according to the report.
An even stronger contrast can be drawn between the low support of the Vanguard Group’s index funds for key ESG resolutions – tracking the Vanguard house view at 24% support – and the Wellington-managed Vanguard funds, which supported nearly 80% of the ESG resolutions Voted.
To call proxy voting nuanced would be an understatement, and most retirement plan participants do not have the resources or funds to specifically track proxy voting for the wealth managers and funds listed in their company-sponsored retirement menus.
As part of the Morningstar study, investors were interviewed to rate their convenience and understanding of proxy voting. According to Samantha Lamas, a behavioral scientist at Morningstar, about half understood the process.
“It was one of our main concerns because proxy has always been a vague and hazy topic for investors,” she said. “We hope to bring proxy to light, but these days investors can take a look at how the funds they now own are voting.”
Part of the challenge is tracking down the proxy votes reported in August that could have been voted up to 14 months earlier, and then the challenge is breaking down the data.
“A person with a normal browser can’t even open the documents because some are over 100 megabytes in size and that is not usable for most investors,” Cook said. “That’s the kind of thing the SEC wants to address, along with more regular filing and more standardized reporting to make it easier to make sense of what you read.”
Morningstar’s research into S&P 500 Index Funds proxy voting in ESG resolutions found that some funds supported all resolutions passed and others less than 10%.
Even dedicated ESG funds identified as sustainable funds did not support sustainability measures at shareholder meetings as routinely as might be expected. Morningstar research found that in 2020, some were in favor of all major ESG resolutions, while others were less than 20% in favor.
This type of information could allow retail investors to have more control over how their dollars are matched with certain ESG-related causes if it is more readily available and accessible to plan participants.
Peter Reali, Head of Engagement, Responsible Investing at Nuveen, is a big fan of more transparency in proxy voting and believes that fund companies should even be asked to give the reasons why they voted in a certain way.
“If you look at the full history of wealth managers, you can reveal the reasons for your voting results, and some companies even talk about them before they vote,” he said. “There is clearly a drive to be more transparent about proxy voting, and certainly the tide is changing and we are seeing interest from the SEC.”
Mike Willis, Founder and Senior Portfolio Manager at Index Funds, isn’t waiting for regulators to call for more transparency or find new ways to attract investors.
Investors in the S & P 500 Equal Weight (INDEX) index fund can vote on the resolutions of the underlying shareholders via the fund company’s website, which Willis then takes into account when voting on behalf of the fund shareholders.
“How can a fund advisor vote on behalf of shareholders if he doesn’t even ask for their opinion?” Said Willis. “Our first rollout is to bring a viable proxy voting product to market. However, we have a long-term vision to decentralize the proxy voting process back to the individual investor.”