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The FCA’s Vote Reporting Group – an independent working group on which the FCA is observer and secretariat – recently published its proposals for a voluntary, standardised ‘vote reporting template’ for asset managers to disclose their voting activity to the asset owners. The FCA is concerned that the current system for shareholder vote reporting is insufficiently transparent and does not provide asset owners with sufficient insight into the stewardship activities of the asset managers they engage. This concern was flagged in 2019 as part of the FCA’s Feedback Statement on Building a Regulatory Framework for Effective Stewardship (FS19/7). Now, with increasing pressure between market parties in the area of ESG and the looming implementation of the Sustainability Disclosure Requirements (SDR), of which effective stewardship and transparency are crucial elements, the FCA is keen to aid better reporting between parties.
Certain asset managers must already make voting disclosures, under current rules based on the Shareholder Rights Directive. However, this does not capture all asset managers and the requirements are quite high-level, with no fixed template for how the information is set out or what information is shared. Furthermore, the format of disclosures and other communications between asset owners and managers in this area varies greatly, with information being providing in disparate forms. This makes comparison between asset managers difficult, and the regulator is concerned that not all managers provide the correct level of detail. This has implications for transparency, and the asset owners’ ability to understand what their managers are doing.
The problem is becoming especially obvious in areas such as ESG, where managers may need to prove that they are voting in line with their mandate. Given that shareholder voting is one of the most effective mechanisms for driving change in corporate behaviour, it is vital that owners get the results that they expected when they invested.
The proposed rules for the new SDR highlight this tension. For example, effective stewardship is one of the five measures the FCA will use to assess whether investments qualify for the Sustainable Focus, Sustainable Improvers and Sustainable Impact labels. Reforming vote reporting so that it makes managers declare their voting patterns to owners is an obvious and relatively easy way of holding them to account.
For these reasons, in theory at least, the template is a good idea. It should streamline the reporting process and make reports more consistent across the market, in terms of both form and content. By inviting scrutiny, it should also emphasise to managers the importance of taking their stewardship role seriously and incentivise better behaviour by shedding light on bad managers.
There is a risk that the form simply becomes another piece of admin for managers to wade through, rather than something that precipitates change. However, one would expect that it should not be too arduous for managers to reformat information that many will already be reporting on in some form or other, and that all should have available. The final template will also very likely to be familiar to many managers, since the Vote Reporting Group has based its template on the US Securities and Exchange Commission’s (SEC’s) ‘Form NP-X’. This is a standardised template which has been required filing since 2003. Many asset managers have US exposure and are well-acquainted with the process.
The most pressing risk is that the template is not widely adopted, as it will be voluntary. Many managers may simply choose to ignore it. If the template does not fit well with current practices and is not widely adopted across the industry, then it will fail to be a source of the comparable, consistent data that is the purpose of the initiative.
A better solution, briefly floated in the Consultation Paper, might be a public repository of vote reporting. This would solve many of the potential issues with a voluntary template; forcing managers to share publicly what they are doing would allow owners to make clear comparisons and would also be an even greater incentive for managers to exercise good stewardship practices. However, as a much more impactful intervention it would also likely be met by much more resistance from the industry. Concerns that through the repository, firms could be forced to disclose commercially sensitive information publicly would also need to be addressed.
If it is not widely used, the standardised template could end up as a bit of a non-event. However, if it is sufficiently adopted, it could fill another piece of the puzzle of how to embed ESG in the industry, which is major focus of the FCA. Regimes such as the SDR bring with them a need for greater transparency from firms, so it is clear investors are getting what they anticipated. If firms do not allow themselves to be held to account through voluntary schemes, they may soon find that the regulator takes a more muscular approach.
The Vote Reporting Group is asking for comments on this Consultation Paper by 21 September 2023; seeking feedback on the fields and information to be reported, as well as dissemination of data and ongoing maintenance of the template.
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