Proxy voting adds ESG leverage to retirement plans

A new Morningstar report presents proxy voting as a backdoor entry to ESG investing for retirement plan participants. As advocates pressure for simpler proxy voting procedures, retail investors could gain considerable leverage.


Increased attention on proxy voting could represent a backdoor into ESG investing for retirement plan participants.

With only 3% of 401(k) plans currently offering investments labeled as adhering to environmental, social and governance causes, most retail investors are unable to establish a footprint in the wildly popular sustainable investing space.

But, as investor advocates and regulators increase pressure for simpler and more transparent proxy voting procedures, it is possible retail investors could gain considerable leverage over the way fund companies currently vote on shareholder proposals.

While the basic mechanics of annual proxy voting is still a long way from the kind of user-friendly transparency that would invite the involvement of most retirement plan participants, a report out Tuesday by Morningstar describes proxy voting as the “sleeping giant” of ESG investing.

“We’re suggesting proxy voting needs to be made more visible, so it does become a decision point for investors,” said Jackie Cook, Morningstar’s director of stewardship research.

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Mutual fund investors, as indirect investors, do not directly own shares of a publicly traded company inside a fund and are not allowed to cast proxy votes on shareholder proposals, but they can track the way their mutual funds and mutual fund companies are voting.

Since mutual funds exercise proxy votes on behalf of fund investors, they are duty-bound to represent the interests of their investors when voting at shareholder meetings. When it comes to passive investment strategies, proxy voting takes on an even-higher level of significance because divestment is less of an option.

“The best place to start is by looking at the asset manager, because research shows the house view prevails, and that will give a sense of how they proxy vote for the underlying funds,” Cook said.

For example, the Fidelity Investments funds subadvised by Geode Capital Management supported nearly 90% of key ESG resolutions, whereas Fidelity’s FMR-managed funds supported around 50% of resolutions, according to the report.

An even starker contrast can be drawn between The Vanguard Group’s index funds’ low support for key ESG resolutions — tracking the Vanguard “house view” at 24% support — and the Wellington-managed Vanguard funds, which supported almost 80% of the ESG resolutions voted on.

To describe proxy voting as nuanced would be an understatement and most retirement plan participants have neither the resources nor wherewithal to specifically track the proxy voting of the assets managers and funds listed on their company-sponsored retirement plan menus.

As part of Morningstar’s research, it surveyed investors to gauge their comfort with and understanding of proxy voting and found about half understood the process, according to Samantha Lamas, behavioral researcher at Morningstar.

“It was one of our main concerns, because proxy voting has always been a vague and hazy issue with investors,” she said. “We’re hoping to bring proxy voting to light, but in the present day one thing investors can do is take a look at how the funds they own now are voting.”

Part of the challenge is tracking proxy votes typically reported in August that could have been voted up to 14 months earlier, and then there’s the challenge of dissecting the data.

“An individual with an ordinary browser cannot even open the documents because some are over 100 megabytes large, and that is not useable to most investors,” Cook said. “That’s the kind of thing the SEC is wanting to address, along with more regular filing and more standardized reporting, so it’s easier to make sense of what you’re reading.”

Morningstar’s research on S&P 500 Index Funds’ proxy voting on ESG resolutions found that some funds supported all resolutions voted and some supported fewer than 10%.

Even dedicated ESG funds, those identified as sustainable funds, did not support sustainability measures at company shareholder meetings as routinely as one might expect. Morningstar research finds that, in 2020, some supported all key ESG resolutions voted, while others supported fewer than 20%.

This is the kind of information, if more readily available and accessible to plan participants, could enable retail class investors to have more control over how their dollars are being aligned with certain ESG-related causes.

Peter Reali, head of engagement, responsible investing at Nuveen, is a big fan of more transparency around proxy voting and thinks fund companies should even be required to include the reasons why they voted a certain way.

“Looking at the entire story from asset managers, you can disclose the rationale for your voting record, and some companies are even talking about doing that before they vote,” he said. “Clearly there is a drive around more transparency around proxy voting, and certainly the tide is shifting and we’re seeing interest from the SEC.”

Mike Willis, founder and lead portfolio manager of Index Funds, isn’t waiting for regulators to require more transparency or create new ways to engage investors.

Investors in the Index Funds S&P 500 Equal Weight (INDEX) are able to vote through the fund company website on underlying company shareholder resolutions, which Willis then considers when voting on behalf of fund shareholders.

“How can a fund adviser vote on behalf of shareholders if he doesn’t even ask them their opinion?” Willis said. “Our first rollout is to get a viable proxy voting product on the market, but we have a long-term vision to decentralize the proxy voting process back to the individual investors.”