Morningstar Magazine - December 2017/January 2018 - 41

are increasingly eager to reach out to them
to exchange opinions on ESG issues.
We found that most surveyed firms that have
a structured program of direct engagements seek
the support of their investment teams. In fact,
in some cases, especially in firms where active
management dominates (for example, Amundi and
UBS), the ESG analysts and portfolio managers
primarily drive the engagement process.
When it comes to the issue of joining forces
with other investors, including activist investors,
the views are split. Given their size, the largest
asset managers (such as BlackRock, Vanguard,
and SSgA) have a clear preference for oneto-one engagements, ideally behind closed doors.
Others, typically smaller firms, are keener
to work with peers and share resources, especially
in cases when individual engagements would
have a low likelihood of success. All, however, are
subject to regulatory constraints. In some
countries, such as the United States and
Germany, engagement is at risk of being seen
as collusive practice.
Disclosure-An Area Needing Improvement

Transparency of voting and engagement activities
is an important part of an asset manager's
stewardship duties. Yet the variety of national
regulatory requirements and customs
mean that disclosure practices differ significantly
between managers and countries.
Most surveyed asset managers publish voting
records for their funds on their websites
in countries where the regulator or a stewardship
code require them to. But too often these
records are hard to find, and where disclosure isn't
a requirement, they may be inexistent. Also,
very few explain the rationale behind important
votes (that is, votes against management,
abstentions, or contentious votes). This is certainly
an area for improvement. Indeed, providing
reasons behind a vote allows stakeholders
to assess whether the asset manager has voted
in line with its policy and in the best interest
of shareholders.
Meanwhile, with respect to disclosure
of engagements with investee companies,

differences are even more pronounced. Some
managers, including BlackRock, Vanguard,
and UBS, are averse to disclosing the names of the
companies with which they engage. They
believe that to build trust and develop constructive
long-term dialogues with company management
and boards, conversations need to be kept
confidential. Some commented that "naming and
shaming" can be detrimental. This, however,
doesn't seem to be a concern for Amundi, which
publishes an annual engagement report
detailing nearly every action it had with companies
during the year. SSgA also discloses the names
of all the companies with which it engages
each year, but it only provides full details on a
selected number of successful engagements.
In the future, we expect increased disclosure
of voting and engagement activities. Already, there
is pressure on asset managers to share more
details on voting decisions with the public.
Equally, more companies will be publicly named
and shamed when engagement has failed.
It's already been seen in high-profile cases such
as Exxon Mobil. This year, BlackRock started
publishing-on a very limited basis-statements
on its engagements and votes in relation
to certain proposals.

While large asset managers with economies
of scale should be able to absorb the additional
costs, it might be more of a challenge for
the smaller firms. To remain competitive, these
firms will have little choice but to either
do the minimum required or go down the
outsourcing route.
Expect Greater Scrutiny

As assets continue to flow into passive strategies
and responsible investing becomes increasingly
important, one can only expect greater
scrutiny of index managers' stewardship activities.
As our research shows, the largest index managers
in the world have intensified their efforts in
the areas of voting and engagement. They are
looking to influence investee companies and help
improve ESG standards across the board. Many
plan to carry out more, better-quality engagements,
despite the associated costs, the difficult-toquantify prospective benefits, and the fact that any
fruits from these efforts are bound to be
shared with competitors. It is now incumbent upon
these managers to enhance disclosure
to improve public awareness and understanding
of their activities. K
Hortense Bioy, CFA, is director of passive funds
research, Europe.

We also expect index managers to become
more vocal on ESG topics through public
statements on their websites, opinion pieces
in major publications, speaking engagements, and
interactions with the media. Ultimately,
this will also influence their product offerings.
In fact, it already has. The SPDR SSgA
Gender Diversity ETF SHE provides a good example
of a fund created to advance a manager's cause.
The Issue of Cost

Our study of index managers' stewardship
practices would not be complete if we didn't
address the issue of cost. The additional human
and technological resources allocated to
voting and engagement activities have come
at a cost for all the surveyed managers. And
as their ESG-dedicated teams continue expanding
and developing their expertise, the expenditure
will continue to rise. This raises the question
of whether these firms will be able to absorb the
extra cost without increasing their fees.

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Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018