Although many investors may not be aware of the link between 401(k) plan investments and the voting power these investments carry, a new report suggests that it’s only a matter of time before proxy voting becomes another tool for fund investors to express their ESG preferences.
As ESG becomes increasingly relevant to investing, investors are realizing the power of active ownership as an investing strategy and are turning their attention to how ESG issues are represented on corporate proxy ballots and how funds vote on these issues, Morningstar reports in “The Power of the Proxy in Retirement Plans: Empowering workers saving for retirement with a voice on ESG issues.”
To better understand what everyday investors thought about the incorporation of ESG factors in proxy voting, the firm conducted a short online survey. Their sample consisted of 175 individuals who were at least moderately familiar with the shareholder voting process for publicly traded companies, with approximately half of these participants actively contributing to 401(k) plans.
It found that 61% of individuals surveyed felt that ESG issues should be addressed in their funds’ proxy voting and 75% indicated that they would like to have more of a say in how their funds voted.
When Morningstar asked if they would like their own ESG preferences to be reflected in the shareholder voting practices of the funds they own, a little more than half of participants responded yes to this question.
The authors caution that the result does not mean that fund investors would choose funds with strong ESG voting records—some may use this information to avoid such funds. “It does, however, suggest that many fund investors who understand how proxy voting works would consider using fund-level proxy voting information as a way of aligning their ESG preferences with their investment,” write authors Jackie Cook, Director of Investment Stewardship Research; Samantha Lamas, Behavioral Researcher; and Michael F. Thompson, Behavioral Researcher.
Still, even though the number of ESG funds available in the industry tripled between 2014 and 2020, Morningstar finds that less than 5% of DC plans include at least one sustainable fund.
“Given that sustainable funds are rarely provided as investment options in workplace 401(k) plans, proxy voting may offer fund investors another way of aligning their ESG preferences with the funds they choose for their retirement savings,” Cook, Lamas and Thompson emphasize. Further, they note that some investors may prefer to use both approaches where available.
Morningstar also finds that many of the funds with the most 401(k) assets vote predominantly against key ESG resolutions on corporate proxy ballots and tend to follow the voting strategy set at the asset manager level. Moreover, the report observes that a few asset managers dominate the 401(k)-fund space, which limits the degree to which plan participants can choose funds to align with their voting preferences.
Regulatory and Market Initiatives
Regulatory and market initiatives could raise the profile of fund ESG proxy voting, the report further notes. “The SEC’s interest in strengthening mutual fund proxy voting transparency—announced in March—is aimed at giving retail investors more insight into how their money is voted, especially in light of the growing interest in ESG shareholder proposals,” the authors observe.
Then-SEC acting chair Allison Herren Lee cited retirement savings’ contribution to index fund investing as a primary consideration in this initiative.
And while the report doesn’t specifically discuss this development, another factor is the recent announcement by the Department of Labor that it won’t enforce the final rules put in place under the Trump administration on financial factors in selecting plan investments and fiduciary duties regarding proxy voting and shareholder rights. The DOL noted that it is conducting more stakeholder outreach to determine how to craft rules that better recognize the role that ESG integration can play in the evaluation and management of plan investments.
The report further notes that several startup initiatives, like U.K.-based Tumelo, are offering platforms and proxy services that aim to close the gap between the end investor and the voice that their investments carry through proxy voting and engagement.
“The general strategy is to offer transparency into ESG issues on proxy ballots and to drive shareholder involvement by allowing investors to share their ESG voting or engagement preferences via an online, streamlined process,” the authors explain.
They further observe that, not only do these tools help companies understand their investors’ values, but they also have the potential to promote engagement and commitment between end investors, plan providers and fund providers.
