Index and exchange-traded fund providers are making good progress in corporate governance, but more work is needed to enhance disclosure and communication, said Morningstar.
The firm's latest research report, "Passive Fund Providers Take an Active Approach to Investment Stewardship," surveyed index strategy and ETF providers across the U.S., Europe and Asia. Most firms also run an active business, which Morningstar said in its report is in some cases much larger than the passive component. Collectively, the firms have more than $20 trillion in assets under management.
The report highlighted six key findings on the stewardship activities of the money managers. "The shift to index investing hasn't led to an abdication of stewardship responsibilities," said the report. On the contrary, Morningstar found that index managers such as BlackRock, Vanguard Group and State Street Global Advisors "are increasingly taking an active role in the oversight of investee companies."
However, Morningstar did find a range of stewardship practices based on scale, investment style, philosophy, region and history.
Morningstar found that managers are increasingly committed to using tools such as proxy voting and engagement in efforts to improve environmental, social and governance activities among their holdings. "This has coincided with increasing demands from investors for more focus on responsible investment and increased pressure from regulators to exercise strong corporate oversight."
Further, almost all the firms surveyed apply the same stewardship principles to all of their holdings, irrespective of whether they are in active or passive portfolios.
Morningstar said all but one of the 12 firms surveyed indicated that they were stepping up engagement efforts despite associated costs, difficult-to-quantify prospective benefits, "and the fact that any fruits from these efforts are bound to be shared with competitors," said the report.
U.S. and Japan-based index managers appear particularly willing to voice their concerns, with some directly challenging corporate management — as European managers have tended to do for years, said the report. This is notable in areas such as board composition and climate risk, showed the research.
The final finding was that investor scrutiny of stewardship practices is intensifying and more can be done by managers. "Enhancing transparency and communication will improve public awareness and understanding of index managers' stewardship activities," said the report.
