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Mandating Scope 3 disclosures remains unpopular amongst US asset management firms, said Morningstar in a new report that discussed the topic and how it was impacting the market.

In the paper, “Voting Policies: Still No Consensus on Climate or Social Issues” by Linsdey Stewart, Director of Investment Stewardship Research at Morningstar, the evidence showed that US manager policies reflected a wide-ranging set of views, but that many were shying away from taking a more substantive stance on ESG-related issues when voting.

Among ten large US asset managers, the areas with the broadest voting policy agreement were core climate-related disclosures, such as Scope 1 and 2 greenhouse gas emissions, and workforce-related disclosures. However, Scope 3 emissions were not included in this list.

Recently, it was argued that US institutional investors, asset managers, and asset owners had begun to show a higher commitment to implementing a variety of measures to address climate change and reach net-zero goals, according to a new report from Cerulli Associates.

Neutral language - not the way forward?

Stewart said that a key feature of low support for voting on ESG proposals was the use of neutral language in policies.

This, he said, often meant “implying case-by-case consideration instead of expressions of general support or opposition – [which] is more prevalent on social issues, compared with environmental ones.”

“Examples of voting policies that encourage workforce-related disclosures but generally rely on management discretion as to what is provided."

“Voting records from 2023 (based on key resolutions with at least 40% independent shareholder support) imply that neutral language in US managers’ voting policies are usually applied conservatively,” said Stewart. “Recent manager exits from the Climate Action 100+ engagement initiative indicate that this trend will continue,” he continued.

One example was in the votes around workforce issues. “Examples of voting policies that encourage workforce-related disclosures but generally rely on management discretion as to what is provided,” said the paper.

It gave an example of the argument and neutral language from asset manager, Fidelity, on its policy for conventional investing strategies: ‘“As part of our efforts to maximize long-term shareholder value, we incorporate consideration of human and natural capital issues into our evaluation of a company if our research has demonstrated an issue is financially material to that company and the investing funds’ investment objectives and strategies.”’

This example was compared to the more forthright and detailed language used in workforce issue voting records by a competitor, Capital Group.

‘“Generally, we believe racial and gender equity and diversity within a company’s workforce, including its management and the board of directors, contribute to the company’s long-term value creation. To that end, subject to local norms and expectations, we expect companies to be able to articulate a strategy or plan to advance these values. Additionally, we support reporting and disclosure of data relating to workforce diversity and equity across various types of roles and levels of seniority, consistent with broadly applicable standards”,’ the statement said.

Other managers, such as Vanguard, BlackRock, and State Street, were also praised in this section.

Previously, Morningstar said its studies had shown that many US asset managers were turning away from ESG because of the political climate, as Europe continues to adopt measures at breakneck speed.

Scope 3 – necessary operational headache?

However, it was the topic of Scope 3 that saw a majority of companies turn away from the supportive language in their set voting intentions. Only European asset manager BNP Paribas was classed as having ‘supportive’ language.

The majority of the 10 asset managers were classed as ‘neutral’ – Vanguard, State Street, Capital Group, and Fidelity. The neutral language was tied to voting policies that refer to Scope 3 emissions disclosures as potentially beneficial without necessarily requiring them.

“If we’re talking about infrastructure – usually in a company with a heavy asset base and rather few full-time employees with dedicated tasks – then we need to support that team."

Examples of voting policies that are openly opposed to requiring Scope 3 emissions disclosures at present or are ‘unsupportive’, though they may encourage voluntary disclosures, included Dimensional and BlackRock.

The changes come as more fund managers are turning to net-zero portfolio goals. Nevertheless, the operational risks in this area are complex and resource-heavy. Julia Kosulko, Senior Sustainability Manager and Net-Zero Lead at Nordic asset manager Infranode said in a recent interview with Fund Operator that dealing with Scope 3 had been something that many had ‘struggled’ with due to data needs, especially as pertained to the companies on which it held voting rights.

“If we’re talking about infrastructure – usually in a company with a heavy asset base and rather few full-time employees with dedicated tasks – then we need to support that team. That support should come from owners who provide solutions for specific knowledge and tool gaps,” she said.

Kosulko added that areas around sustainability and net-zero were also heavily reliant on goodwill from staff. “We’ve looked at different potential scenarios and received extra support to investigate various risks, for example. As mentioned, we ask about the implications for our investment and ownership strategy – as well as more practical things, such as how do we book it?” she said.

This strategy could be a key focus for companies that are not embracing Scope 3 questions as quickly as other asset managers – working to bring them on board with the potential benefits could be essential.

 

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