"We undertook more than 3,000 engagements this year, a 50 per cent increase on last year. Voting is how we hold companies accountable when they fall short of our expectations; we opposed the re-election of over 5,100 directors this year."
Mr Barron says: “The end client, the person who trusts us with their money, they will hold us accountable. They would take the money away from us if we didn’t use the voting power we have responsibly.
"Index funds tend to be among the largest investors in listed companies, and that gives us a great deal of power to vote against company management. And because we are long-term investors, the company management know we will always be there making our points.”
A spokesperson at Vanguard says the company views itself as a “permanent” owners of a company in which it is invested, and so uses its voting power to achieve long-term change.
Barry Cowen, senior portfolio manager at wealth management house Sanlam, says that index investors power comes from their ability to say: “‘Either change as a business, or be sold, our rules demand it’ .
He adds that: “Such businesses can, and do, vote en masse, the same way any fund does or can. In the case of bond investing, where voting is less relevant, the power to drive down the cost of capital for good actors, remains.
"Indeed, given the vast sums that are invested in aligned vehicles, the power here could be very large. Drafting of and potential evolution of the rules is all important, to achieve the desired effects, but can be done.”
Charlie Parker, managing director at discretionary fund house Albermarle Street Partners, says index investors have a “responsibility” to use their voting power to drive change, but adds: “In recent years there has been huge progress made by the largest investors to inject real rigour to this process.
"Of course they lack the basic ability to threaten to disinvest so it is their ability to force change that is the priority. There is further to go here of course because whether you invest actively or passively you are still committing your money to enable somebody else to use that capital. Your moral duty is the same whatever label you give yourself.”
Diversification
Amer Khan, European managing director of ESG consultancy firm Entelligent, says that an inherent advantage of investing for ESG exposure via index funds is that a client’s exposure is much more diversified.
Therefore, if there is one business which behaves in a way which is not in line with the client's values, and is subsequently removed from the relevant index, the impact on a client’s portfolio will be less. This is because, as an index investor, they will own a broader portfolio than if the same thing happened within an actively-managed ESG portfolio, which would own far fewer investments.
