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Supplements » ETF Report March 2022

ETFs roundtable: ESG has wound itself into ETFs

Funds Europe – As ESG becomes more ingrained in the fund management world, is it right for the shares to be held by ETFs to be voted on by the fund managers that operate those funds?

Rushe – It makes some sense to let investors have a vote in companies that they’re ultimately investing in. However, the first question is one about who you define as the investor.

Despite all the transparency of the ETF itself, they lack transparency when it comes to who the holders are. This is because of the way they’re held through various CSDs [central securities depositaries] and custody networks. The question is, who are you saying can vote? Even if you determine that, then you have to look at what that actually means operationally.

If you have a fund that has hundreds if not a thousand-plus securities and you have thousands of investors in the fund and you’re suggesting that whenever there’s a vote on any one of those stocks that you’re going to go out to those investors and ask them to vote, that is a huge amount of administrative work.

I think, and the question is, is it feasible or not? I know a couple of issuers are considering it and have said that they’ll try and deliver to investors, but to me it seems like a huge burden of activity that may create significant cost.

Paquier – When you combine actively managed ETFs with ESG, you end up with a nice solution when it comes to voting rights because you don’t only participate in the exclusions of certain names, certain industries or certain sectors, but you also actively participate in the inclusion. And you can exercise your voting rights in a precise and dynamic way.

This is what we do irrespective of any vehicle; we analyse and go through around 8,000 names every year across 80 markets, and we exercise those voting rights to advocate ESG principles on behalf of clients who invest within our products. We vote precisely with the engagement that we take as an asset manager and as a firm. I believe that going beyond pure exclusions makes a big difference.

Cripps – To be honest, I think the custody-chain aspect is actually a phase-two solution that we’re not quite ready for here in Europe yet. The way that we see proxy voting at the moment is that there are certain innovative spearheads of the market, where managers are looking to pass on the voting decision-making to clients. But I think in the interim, we should start to get familiar with a system where the managers will be making all of the votes in their holdings based on their view.

Once you’re doing this, if you look at a large global manager, it doesn’t matter whether the exposure is through an ETF of an active fund. It’s about having an in-house manager’s view on what good governance means for you and is consistent with a 1.5° scenario and the ETFs’ shareholders values.

What’s interesting is that we see that a lot of clients – particularly on the large institutional side – who are starting to look at their proxy voting rights for funds more as a responsibility than a right. So, this is something that they expect managers to be doing now, engaging on behalf of the assets that are owned.

Fuhr – I think in the short run, having the managers vote and stay consistent with that ESG lens that investors in the fund are expecting is an important thing. We do see one fund in the US that is trying to be an activist investor. It’s a new issuer called Engine No. 1, which is headed by Jennifer Grancio, who used to be the head of the iShares business in Europe. They are unique in their approach to trying to be active and actively voting. They got board members changed on the Exxon board recently.