Being truly responsible investors — and telling the world about it — would set asset managers apart
Clients recognise the value of active ownership, but analysis shows quality of reporting is disappointing
As elsewhere in the world, asset managers in SA are increasingly under pressure to prove their worth as cheaper index funds typically outperform actively managed funds. Some asset managers are thus repositioning themselves as responsible investors.
By becoming signatories of the UN-backed principles for responsible investment (PRI), signatories commit to incorporate environmental, social and governance (ESG) issues into investment analysis and decision-making processes. They also undertake to be active owners who incorporate ESG issues into their ownership policies and practices and to report publicly on their activities and progress.
As far as could be established, no academic research has been undertaken on the nature and extent of active ownership reporting among local PRI asset manager signatories. We therefore analysed 64 publicly available PRI transparency reports over the period 2016 to 2018.
The first important observation is that very few of the asset manager signatories completed the mandatory transparency report. Only 22 of the 36 signatories did so in 2016, 22 out of 37 in 2017 and 20 out of 30 in 2018. Although the PRI grants new signatories a 12-month grace period, the low level of public disclosure is quite disconcerting.
A large and growing percentage of signatories also failed to complete the direct-listed equity active ownership section of the transparency report (38.89% in 2016, 40.54% in 2017 and 47.37% in 2018). To compound matters further, voluntary questions were often left blank.
Contrary to expectation, several signatories did not have formal engagement policies. Adrian Bertrand, co-founder and CEO of Six Capitals ESG Advisory, an independent ESG advisory firm, attributes this finding to the “somewhat informal and reactive nature” of shareholder activism in the country. As SA has a very well-developed corporate governance framework, it came as no surprise that governance considerations featured prominently in the asset managers’ formal engagement policies.
Environmental factors have also received more attention in recent months. Bertrand ascribed this trend to a greater awareness among signatories of the risks posed by climate change and the recently implemented carbon tax. He further added that asset managers might be taking their cue from the SA government and other industry players that are actively promoting a greener economy. Transformation and broad-based BEE were also pertinently mentioned in some signatory policies.
Two-thirds of asset managers (67.18%) reported having formal processes for identifying and prioritising engagement activities. As expected, the most important criteria used to identify and prioritise engagement activities related to the materiality of ESG factors. A fairly large number of signatories had no objectives or timelines for their engagement activities.
To ensure that engagements are successful, asset managers should not only have clarity on what they would like to achieve but they should ensure that requests for change are implemented. More than half of the asset managers (57.81%) followed up in all cases, 15.63% in the majority of cases and 6.25% in the minority of cases. Only about a fifth of the signatories failed to follow up altogether.
A slight increase was noted in the number of asset managers taking concrete steps to monitor and evaluate the progress of their engagement endeavours.
By speaking to investee companies with a unified voice, signatories can be more effective change agents. Very few of the asset manager signatories, however, collaborated on ESG matters. This observation could be due to concerns about acting in concert. According to Bertrand, more discussions are, however, taking place on themes such as executive remuneration and climate change.
In 2018, all 20 of the signatories had formal voting policies. Most of these policies included guidelines on governance considerations, conflicts of interest, corporate decision-making and transparency. Only a third of asset managers (35.94%) informed investee companies of the reasons why they or their appointed service providers abstained or voted against certain resolutions. A further 25% did so if they engaged the company on the matter previously.
Due to a lack of client demand, very few signatories published details of their voting decisions. This finding could also be attributed to attempts by asset managers to avoid follow-up questions from clients, the financial press and companies.
To get a sense of the relationship between asset manager size (as measured by assets under management) and the quality of active ownership reporting, a relative disclosure score was computed for each signatory based on its 2018 PRI report.
The score represents a weighted contribution from 10 of the subsections dealing with engagement and voting policies, processes, outputs and communication with stakeholders. Assets under management data were sourced from the Alexander Forbes manager watch annual survey 2018.
Contrary to the resource-based theory of the firm, larger asset managers did not report significantly more than their smaller counterparts. SA asset managers who claim to be responsible investors by virtue of being PRI signatories should report more details on their public and private shareholder activism endeavours. If done effectively, they could differentiate themselves from their peers.
A competitive strategy that highlights “points of difference” rather than “points of parity” could enable asset managers of all sizes to attract a larger proportion of clients who are recognising the value of active ownership. Such a differentiation strategy is likely to become more important as pressure to reduce asset management fees intensifies.
Signatories are also encouraged to formulate clear(er) engagement policies, objectives and timelines. This recommendation is based on Winston Churchill’s famous claim that “failing to plan is planning to fail”. Engagement success could be enhanced by having regular, substantive and detailed follow-up discussions. Finally, asset managers should realise that persistence is critical in promoting real change as some adjustments might take time to manifest.
Active ownership is likely to receive more attention in the country, given the Financial Sector Conduct Authority’s June 2019 guidance note on the sustainability of investments in the retirement industry. Success in this area could promote the long-term interests of thousands of retirement beneficiaries.
Viviers and Steyn are academics in the department of business management at Stellenbosch University.