ESG screens are common among asset managers today, in response to growing client demand for investments that align with their values.
Much of the buzz has focused on the ‘E’ and ‘S’ of ESG, as managers dumping fossil fuels and other ‘vice’ stocks have grabbed headlines. And while early studies are pointing towards the potential outperformance of ESG-focused strategies, asset managers are
only beginning to see the impact that sound governance can have on their bottom line.
This isn’t just about the corporate governance practiced by the companies they hold in their portfolio. It’s about the stewardship that asset managers practice on behalf of their shareholders.
Stewardship is the responsible allocation, management and oversight of capital to create long term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. This includes setting expectations, oversight
of assets, engaging with issuers, voting and so forth.
Good stewardship means being aware and active on rights issues, corporate actions and other responsibilities tied to holding a stock or bond. Too often, managers make decisions with little-to-no analysis. They can rely on third parties to provide guidance
on how to vote – but in many cases, these recommendations overlook the total value for the individual investors that the manager or advisor serve.
The responsible exercising of shareholder’s interests is catching on among influential institutions. Last December the GPIF (Government Pension investment Fund of Japan) announced that it was suspending its stock loan activities on all foreign held equities. Hiro
Mizuno, the Chief Investment Officer of the $1.6tn fund cited the practice of short selling as not being consistent with what the GPIF expects from its portfolio companies or the asset managers it mandates to run its fund:
“As part of its stewardship responsibilities, GPIF requires its asset managers to enhance the long-term value of investee companies by conscientiously exercising voting rights for all the shares they hold. Stock lending, which GPIF currently conducts
over the course of fund management, results in a temporary transfer of ownership rights to the borrower.”
Given the GPIFs commitment to good stewardship, ESG and long-term focused investment, this act has far reaching implications. Securities lending is by no means an afterthought – it had been generating the fund over $100 million each year. Yet despite this,
the GPIF clearly felt that their commitment to good stewardship would outweigh these revenues.
Where GPIF goes, the industry follows. They were the first to introduce performance fees over fixed fees to all their asset managers and it is likely that other funds will now follow suit to ensure that they too are fulfilling their ESG obligations.
Some managers may balk at the thought of shedding sources of revenue, especially as fees decrease and margins tighten. But does ESG-led investment and sound governance need to come at the expense of sacrificing returns? There are multiple areas where stewardship
can uncover new pockets of value that were previously being missed.
One standout example would be with corporate actions. The maximising of their value is unarguably a key element of good stewardship. Currently, billions of dollars are being missed by funds every year due to sub-optimal elections on voluntary corporate
actions. Much of this is because funds haven’t devoted the proper energy towards making corporate actions decisions that maximize the shareholder, electing to not put proper procedures in place.
Finding the hidden value in corporate actions can be straightforward. Indeed, technology has played a significant part in identifying the value of scrip dividends and other voluntary corporate actions. Making decisions that add extra revenue for investors,
such as taking the share decision on a scrip dividend instead of cash, is a mark of good stewardship.
This becomes even more critical in a post-pandemic market. If 2008-09 is any bellwether, corporate actions volumes may increase dramatically. Corporate actions analysts may find themselves overwhelmed. Asset managers run the risk of leaving even more money
on the table.
For advisers and managers, going ‘green’ means little if they can’t see the green of the revenues gains inherent in good stewardship. Making the best economic elections around corporate actions can help managers enhance returns, while ensuring they meet
their ESG obligations.