Assets Under Management AUM

ETF issuers in conflict of interest with proxy voting

Recent research has revealed that asset managers have voted with the direction of their clients at a “significantly higher rate” than non-clients.

The rise of index funds and the potential anti-competition issues caused by common ownership – notably BlackRock, Vanguard, and State Street Global Advisors (SSGA) – are well documented, but now the spotlight is on the so-called ” big three ”for conflict of interest issues during proxy voting on shareholder resolutions.

Once described as “worse than Marxism” by AllianceBerstein analyst Inigo Fraser Jenkins in 2016 because at least the Communists tried to allocate capital efficiently, the liabilities have continued their dramatic rise since the global financial crisis ( GFC) and showing no signs of slowing down anytime soon.

Highlighting this, the ETF sector now totals $ 8.9 billion in assets under management (AUM) as investors continue to look to the wrapper in response to the constant underperformance of active managers while providing structure. more efficient.

One of the issues that the ETF industry lags behind, however, is proxy voting on shareholder resolutions. There has been strong pressure on issuers to step up their engagement with the companies they hold in their ETFs, particularly from an ESG perspective.

The voting record of issuers, especially large US players, has traditionally been poor, as highlighted in a recent ShareAction report which found that BlackRock and Vanguard only voted 12% and 14% of climate resolutions, respectively. .

In addition to the poor voting results from a sustainable standpoint, a recent report from the nonprofit As You Sow found that the Big Three and T. Rowe Price voted with their clients’ leadership at a “Significantly higher rate” than non-clients.

Between January 2015 and June 2020, the four asset managers also less often supported shareholders’ ESG proposals when they received compensation for financial services that amounted to $ 489 million in 932 companies.

The problem stems from the fact that asset managers are responsible for pension plan services as well as record keeping, advisory and consulting services for many holding companies, which exposes them to a conflict of interest. when they vote on shareholder resolutions.

This problem has come to a head over the past five years with BlackRock, for example, voting with shareholders 9.5% of the time when there were no relationships versus 3.1% when business relationships were present.

This conflict of interest must be resolved if the ETF industry is to gain the confidence of investors, many of whom are still not convinced of the impact passive managers can have on engagement.

If proxy voting could be outsourced to a neutral third party while still disclosing any existing activity, as the As You Sow report points out, this could be an important first step in what appears to be a long way to go.

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