Climate: Asset owner – asset manager “aligning expectations”

In October 2023, Faith Ward, our CRIO, then Chair of the UK asset owner roundtable (now called the Asset Owner Council) convened a roundtable to discuss the perceived misalignment of interests between asset owners and managers in relation to climate stewardship.

The 2023 proxy season provided signs that some asset managers had failed to unequivocally challenge oil and gas companies that were backtracking on their climate commitments. This contrasted with the positions of large asset owners that shared the view that if climate related risks are not addressed through stewardship activities, this can translate into investment risks for their portfolios, affecting long-term beneficiary interests.

This discrepancy triggered the need for robust and constructive dialogue between asset owners and their managers.

The roundtable provided an avenue for discussion of practical steps needed to address the misalignment and identify how fund managers can be better supported in delivering asset owners’ climate stewardship strategies. The discussions were framed by research findings presented by independent academic, Prof. Andreas Hoepner. Using the energy transition in the oil and gas industry as a test case, Prof Andreas and his team had evaluated the voting records of select managers on oil and gas majors. This research provided evidence of a misalignment. The full research which was released in November 2023 provided insights on:

• Misalignment trends – Analyses, particularly the voting record analysis, show varying degrees of misalignment, with stronger discrepancies noted for US oil and gas issuers.
• Voting Rationales – The review indicates that only a select few asset managers publicly align their reasoning with asset owners. Some asset managers perceive voting and ESG engagement as mutually exclusive, raising concerns about potential access loss to management if misaligned.
• Distinct engagement process types across issuers – Issuer approaches range from persistent, long-term engagement with considerable progress to “quick fix” and “jumping the bandwagon” styles, pointing to issues around consistency and long-term approach to engagement.

The research also put forward the following rationales for the gap, highlighting that further research is needed to explore these issues in greater detail:

• Cultural Misalignment: Differences between UK based asset owners and non-UK based asset managers may contribute to misalignment.
• Resource Allocation Misunderstanding: A potential misunderstanding of the importance of stewardship and voting, leading to insufficient resource allocation.
• Fiduciary Duty Conceptualisation: Misunderstanding fiduciary duty, particularly in terms of risk management related to climate change.
• Stewardship Process Disagreement: Differing views over the relationship between voting and engagement were explored, considering the impact on misalignment and ESG engagement success.
• Financial Conflicts of Interest: Potential misalignment due to commercial relationships between asset managers and banks.

The roundtable was a starting point for ongoing dialogue and mutual commitment towards better communication and transparency. In the next phase of this project, asset owner participants will initiate 1-1 bilateral conversations with their managers on the basis of the research findings. The next phase will also look into how asset owners can articulate their views on climate stewardship.