Aegon’s Samantha Chew on stewardship: ‘The case for expression of wish’

It is good corporate governance for pension schemes to ensure views and approaches by asset managers, including on sustainability, align with the schemes’ approaches and beneficiaries’ best interests. However, achieving this can be a challenge, particularly on proxy voting for asset owners in pooled funds, given the varying degree of alignment between asset owners and asset managers on stewardship.

In response to industry concerns expressed by the Taskforce on Pension Scheme Voting Implementation and the UK Asset Owner Roundtable, there is a growing desire among asset owners to take more ownership of how proxy votes are cast in their portfolios. To facilitate this shift, more asset managers have introduced client-directed voting. In essence, this allows asset owners, such as pension funds, to directly participate in the voting process of the companies in which they hold shares, instead of delegating voting to asset managers.

At Aegon UK, we have introduced a distinct approach in our stewardship practices called “expression of wish”. Asset managers usually have the most direct, financially significant and influential relationship with underlying companies, so we believe they are often best placed to progress the most significant priorities of asset owners on engagement and voting. Expression of wish enables asset owners to articulate voting preferences while continuing to benefit from asset managers’ engagement processes. It can also allow asset owners to add value to their asset managers’ processes through providing complementary oversight, accountability and beneficiary views. While expression of wish can be challenging as it requires asset owners to have a good degree of influence over asset managers, we believe that ultimately the impact on long-term beneficiary outcomes could be greater.

Why client-directed voting is not a silver bullet

The choice between client-directed voting and expression of wish depends on the objectives, values and unique circumstances of asset owners. Both approaches have their merits and can be effective in different contexts. It is also important to recognise that, whichever approach is adopted, meaningful voting requires expertise and is labour intensive.

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Client-directed voting can support the consistency of a scheme’s stewardship, particularly on how its votes are cast. However, it also introduces risks of fragmented and/or inconsistent voting decisions diluting progress on responsible investing goals at the company level, potential undue reliance on proxy advisors, and the overall administrative burden. There are also implications of divorcing the asset managers’ engagement activities from voting, instead of supporting objectives set during the engagement process.

Expression of wish to support client-informed, instead of client-directed voting

At Aegon UK, we view expression of wish to be the option that best suits us, as we believe we can make greater positive progress on our responsible investing priorities, to support our beneficiaries’ best interests, through optimising our combined influence on asset managers to leverage their power and drive positive change at underlying portfolio companies.

We firmly believe that achieving meaningful, enduring progress on sustainability requires a targeted approach from asset owners. This is why we have adopted an expression of wish approach, which allows us to engage with asset managers on high priority issues and specific company resolutions. A notable example of this approach is our declaration of wishes, ahead of the AGMs of Shell and Glencore, regarding two crucial climate shareholder proposals. By clearly expressing our wishes, we expect to actively influence the decision-making process for our beneficiaries’ best interests in collaboration with our asset managers. Engaging in this manner demonstrates our commitment to driving positive change and holding companies accountable for their actions.

We closely review the activities by our asset managers and escalate, as necessary, where there are divergences from our priorities. We consider the consistency of asset managers’ alignment between their voting behaviour and our wishes as part of our manager monitoring process, ultimately informing our investment strategy. We also provide updates to our members in our stewardship reporting. By combining monitoring, engagement, investment, and reporting, our approach creates a robust feedback loop to drive responsible investment practices among our asset managers.

Our expression of wish process is still in relatively early stages. While feedback from key stakeholders has been very positive, we will look to enhance our approach, through for example, developing more detailed expectations for our asset managers and portfolio companies on highest priority issues based on their feedback.

Reflections

For asset owners considering exploring the expression of wish approach, it is important to establish sufficient governance accompanying the expression of wishes. This can be achieved by implementing a transparent stewardship framework providing guidance on materiality and voting, as well as having pre-defined escalation measures when asset managers are not aligned with the wishes.

Secondly, to better understand the practical issues impacting progress on sustainable priorities, it is also beneficial to engage directly with some portfolio companies. One effective way to do this is by actively participating in collaborative engagements such as Climate Action 100+ or other industry initiatives that allow meaningful interaction with portfolio companies.

Conclusion

For asset owners, it is critical to address voting misalignment by asset managers in the management of their portfolios. The best way to do so will depend on many factors and the unique circumstances of each asset owner. At Aegon UK we believe the expression of wish approach will ultimately bring significant benefits in terms of informed decision making and impactful action driving long-term value for beneficiaries.

Also read:
The rise of split voting: Is the onus now on asset owners?