US-based independent institutional asset manager, Sage Advisory Services, with over USD14 billion in assets under management, has just published its third annual survey of ETF providers, examining how well they perform their fiduciary duty on behalf of ETF investors.
Sage invests largely through ETFs for its tactical asset allocation and environmental, social and governance (ESG) portfolios, and it feels that responsibility keenly.
Robert Smith, President and CIO of Sage, says: “It’s a fiduciary responsibility on our part that if we are going to invest in your ETFs, and give you the right to vote on my clients’ behalf across a broad range of issues, then I would like to better understand how you are going to fulfil that important responsibility.”
This year’s survey evaluated ETF Sponsors across five areas – proxy voting, company engagement, climate risk, stewardship resources, and disclosure practices.
Sage received a 100 per cent response rate from 14 ETF Sponsors who collectively represented nearly 90 per cent of the US ETF market, including the top four ETF Sponsors – BlackRock, Vanguard, State Street, and Charles Schwab.
Emma Harper, ESG analyst for Sage, who put the survey together, says: “On some accounts it’s very surprising as you can clearly see who puts effort into this and who isn’t as focused and is just going through the motions, not with their hearts in it.”
The survey found that this can apply to large or small firms, with a small, publicly listed ETF provider coming out top.
Quoting the popular figure that over the next 10 years, flows into US ETFs are expected to grow tenfold to USD50 trillion, Sage believes ETF sponsors have enormous power to influence portfolio company decisions.
“I think first and foremost as ETF investors we are responsible to at least cover all the bases for our clients for potential risks – it’s not just what’s in an ETF and how it has performed, but how well it is managed and what form of stewardship it is using,” Smith said. “Our form of engagement is essential and gives us nuances from one firm to another. The most important characteristic is the right to vote as that is where change occurs.”
In 2016, Sage launched a range of ESG portfolios.
The findings from this survey do not ‘out’ ETF providers who fall behind in ESG standing, but the firm will use its findings to determine with whom it will invest.
Harper says: “We utilise our process to determine which providers we will shift to or not.”
“In my opinion, what we are looking at holistically is what are common practices versus best practices – we want to shoot for the best – it’s not necessarily about the size or the financial capability as it is about the intentionalities and the execution of that intent,” Smith says.
In terms of proxy voting, the survey found that, due to increased focus on ESG generally, ETF providers are addressing it in their stewardship process. 93 per cent say that ESG factors had a direct impact on voting behaviour, but only 64 per cent offered an explanation of how and what factors.
Sage comments that there is a disconnect, as Morningstar research shows over the last five years, five of the 10 largest fund families voted against more than 88 per cent of ESG-related shareholder resolutions.
“It is a high-volume management challenge for providers which leads to more reliance on third-party proxy advice (80 per cent), the difficult allocation of limited resources, defaulting to management preferences (half only vote against management less than 10 per cent of the time) and inconsistent policy application across all funds,” the report says.
“There are many votes for providers to cast, April to June is a busy time for ETF Sponsors, with around 3,000 shareholder meetings taking place and tens of thousands of proxy votes needing to be cast.”
In terms of engagement, 78 per cent said they had a formal engagement policy and teams established for this, but only 50 per cent offered any or limited examples of their engagement activities. The report says that many cited a preference for private discussions or engagement as a more effective driver for change versus voting.
The report comments: “Private discussions are not the same in our view as voting because there is no way to tell what was said or acted upon during these conversations. Disclosure of these activities remains largely unknown to shareholders in terms of purpose, goal or objectives with clear outcomes, more disclosure needs to occur if providers decide to duct the public scrutiny that voting brings”.
Turning to climate risk, 85 per cent of respondents were monitoring portfolio company data and manage climate-related risks but only 50 per cent voted in favour of further disclosure on climate-related issues; only 36 per cent voted in favour of proposals looking for greater GHG emission or energy-efficient reporting.
“Many ETF providers missed the mark on voting policy toward climate change shareholder proposals and climate engagement disclosure,” the firm says.
“Several sponsors preferred private engagement to affect portfolio company climate risk mitigation; interactions all too often focus on disclosing data rather than an alignment of corporate strategy with the Paris Agreement and setting specific climate-related targets.”
There is also a rising awareness of climate change as a financial risk, but many struggled with identifying their process to evaluate the risks that climate change poses to their ETF portfolios.
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