Stewardship’s balancing act 

As a number of asset owners become active stewards of capital, matching effective stewardship with efficient reporting is key, according to speakers at Mercer’s 2023 UK Pension Investment Conference.

When investors including pension schemes holding £1.8trn in assets recently wrote to 35 chairs of FTSE 350 companies with high greenhouse gas emissions1, this was a sign of the move towards increasingly active stewardship. Exercising their rights, they asked the companies to hold votes on their climate transition plans at 2024’s annual general meetings (AGMs).

As wider society and regulators put pressure on asset owners to exert influence over climate change, expectations are high that shareholder engagement will encourage companies to cut emissions. Stewardship is also increasingly focusing on issues such as executive remuneration and treatment of the workforce, biodiversity, human rights, and diversity, equity and inclusion.

Engaging with companies and being prepared to vote against them at AGMs is intended to improve long-term value for investors, especially where environmental, social and governance issues may affect long-term profitability. But while there is evidence that stewardship is influencing companies to make positive changes, there is also a danger that the volume of reporting required on voting and engagement activity may sap resources from the business of achieving this.

Is stewardship becoming all about reporting and less about achieving better outcomes? While trustees have a duty to hold their asset managers to account, the need to find a balance was a concern expressed by speakers at Mercer’s 2023 UK Pension Investment Conference in September. “We want to spend our time engaging; we don’t want to spend our time reporting,” explained conference speaker Bobby Riddaway, a professional trustee at Capital Cranfield.

Improving the efficiency of reporting and data collection

The burden of stewardship reporting falls mainly on asset managers who receive increasing requests for detailed information from pension fund trustees and consultants. This follows the statutory and non-statutory guidance on stewardship reporting introduced by the Department for Work & Pensions in June 20222,  which encouraged trustees to be active stewards of capital, and to monitor their activity through transparency of voting and engagement activity.

A welcome proposal from the Vote Reporting Group goes some way towards improving the efficiency of data collection. Supported by the Financial Conduct Authority as Secretariat, it aims to introduce a standardised template for reporting, along with a registry for storing votes. Vanessa Hodge, Mercer’s UK Sustainability Integration Lead, affirmed Mercer’s support for the initiative at the conference, although she noted that there are questions about who would own and fund the central registry.

As pension fund trustees generally do not have sufficient resources themselves to engage directly with companies or take decisions on individual votes, many rely on their asset managers to do this on their behalf. Monitoring the votes cast at AGMs can be complex, though, due to the sheer volume of potential votes that can be taken by an asset manager.

Trustees are legally required to report the votes that are considered ‘most significant’. The definition of significant will vary between trustee boards, with definitions including a vote against a company’s management. Many trustee boards also include themes that are important to their scheme, such as climate change or board diversity. Trustees monitor the summaries of votes reported by their investment consultants or asset managers to better understand how their asset managers have voted, either directly or through a proxy voting service, and whether there is any inconsistency with their stewardship policy.

Monitoring engagement outcomes

When it comes to engaging with companies, this is a labour-intensive process and some engagements can take several years.  For asset owners, it is key to monitor what is happening through the summaries received from asset managers and consultants, as Riddaway acknowledged. “Managers are better experienced on engagement than most trustees. If this activity is delegated to an asset manager, you need to make sure it’s happening and it’s happening properly.”

Trustees can increasingly see how an asset manager’s engagement activity has led to real world change. For instance, Jennifer Anderson, Lazard Asset Management’s Co-Head of Sustainable Investment and ESG, told the conference that the firm had identified 149 engagements with tangible outcomes over the last 12 months. Further, 80% of these were investment outcomes and 20% related to changes at a company. She noted, though, that Lazard is wary of claiming all the credit. “It is challenging to demonstrate the individual impact our engagement has had on a company’s business strategy when there are many stakeholders engaging with the same company on many different issues.”

Despite the progress being made, Anderson also warned against letting reporting divert resources away from engagement. “It would arguably be better to spend more time on engaging with companies versus the huge amount of reporting that we’re providing,” she said. 

Evidently engagement and voting are powerful tools for influencing companies, and it’s important for trustees to monitor their asset managers’ stewardship actions and hold them to account. Yet there is a danger of focussing too much on the reporting and not on action to influence positive outcomes. Judging by all speakers’ comments, greater simplicity, standardisation and consistency seem to be deemed as urgently needed.


2. Reporting on Stewardship and Other Topics through the Statement of Investment Principles and the Implementation Statement: Statutory and Non-Statutory Guidance.

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