Data & Research November 27, 2019

How Large Asset Managers Are Acting on ESG Issues

Morningstar examines 2019 proxy voting data in the emerging age of ESG.

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During a media roundtable hosted by Morningstar, the market research company summarized the 2019 proxy voting season among some of the largest asset managers, dissecting how shareholders and their proxies voted on environmental, social and governance (ESG) issues.

Jackie Cook, director of sustainability stewardship research for Morningstar, said asset managers and investors are talking a lot more these days about ESG, with a particular focus on climate risk, the gender pay gap and human rights challenges. Notably, many of the actual votes that occurred spoke to the reputational risk that companies face while addressing—or ignoring—ESG topics. In fact, this category of risk came up as a term in 45% of the 177 environmental and social resolutions that came to vote in the past proxy season, says Cook.

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“Investors are seeing real risk when companies lose or jeopardize their social licenses to operate,” she adds. “When companies are perceived as exploiting one or more stakeholder groups, they can lose the social license to operate.”

As more firms and investors are understanding how reputation can be jeopardized by ESG complacency, they are committing themselves to supporting the issue. For example, Allianz Investors cast 81% of votes in favor of pro-environmental and social initiatives in 2018, and 87% in 2019. Nuveen and MFS increased their support by large margins. The former grew to 81% pro-ESG initiative votes in 2019, up from 68% in 2018, and the latter rose to 74% pro-ESG votes cast, up from 59% last year.

According to Morningstar, some asset managers had smaller increases in votes, such as T. Rowe Price, with 11% pro-ESG votes, a slight growth from 9% in 2018. American Funds/Capital Group made pro-ESG votes 11% of the time this year, up from 5% in the 2018 season. Other companies saw a decrease, while others remained flat.

The Morningstar data also tracks votes on greenhouse gas goals and climate resilience plans made by the shareholders of large companies including Amazon.com, Chevron, Michael Kors and more. Across all resolutions, all had earned more than 30% support by asset managers, according to the data. The Renewable Energy Goals Plan of designer Michael Kors and the Greenhouse Gas Emissions Reduction Goals from engineering company Fluor received the widest support at 46% “for.”

“There are a lot of statements and reports that have come out from the largest asset managers, and their voting sends mixed signals as to how vigilantly they’re addressing some of these risks that have potentially systemic impact,” Cook explains. “This situation also sends mixed signals to the investee companies. Overall, we know there is more engagement in climate risk, diversity and other ESG topics, but the voting doesn’t always back up the engagement.”

Compliance November 26, 2019

Supreme Court Will Not Review Case Regarding Group Annuity in Retirement Plan

The high court's decision lets stand a ruling that Great-West, as a non-fiduciary party in interest was not liable for alleged ERISA violations.

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On November 25th, the U.S. Supreme Court denied a retirement plan participant’s petition to review a case in which the 10th U.S. Circuit Court of Appeals found that Great-West, as a non-fiduciary party in interest, was not liable for breaches alleged regarding its group annuity contract offered to retirement plans.

In the case, the plaintiff alleged that Great-West engaged in self-dealing transactions prohibited under the Employee Retirement Income Security Act (ERISA) Section 406(b), and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest in violation of ERISA Section 406(a). According to his complaint, Great-West had breached its general duty of loyalty under ERISA Section 404 by setting the credited rate of its Key Guaranteed Portfolio Fund for its own benefit rather than for the plans’ and participants’ benefit; setting the credited rate artificially low and retaining the difference as profit; and charging excessive fees.

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Previously, the 10th Circuit held that Great-West’s contractual power to choose the credited rate did not render it a fiduciary under ERISA because participants could “veto” the chosen rate by withdrawing their money from the fund in question. As to Great-West’s ability to set its own compensation, the 10th Circuit held that Great-West did not have control over its compensation and thus was not a fiduciary because the ultimate amount it earned depended on participants’ electing to keep their money in the investment fund each quarter.

In his petition to the Supreme Court, the plaintiff said Great-West’s conduct violates ERISA’s clear rules barring parties in interest from using plan assets (i.e., the fund contract) to benefit themselves. He pointed out that the U.S. Supreme court previously held in Harris Trust & Sav. Bank v. Salomon Smith Barney that where a party in interest violates those rules, plan participants can force them to disgorge their ill-gotten gains. Multiple courts of appeals have held the same.

The plaintiff said the 10th Circuit “flouted that rule, holding that disgorgement was unavailable because the plan asset at issue was the fund contract—not specific property over which petitioner could himself assert title.”

According to the petition, the sole question before the lower courts was whether equitable relief was available in the form of disgorgement of Great-West’s unreasonable profits derived from its contracts with ERISA plans. The plaintiff argued that by answering “no,” the courts erroneously distinguished plan contracts from any other type of plan asset, the use of which could support disgorgement.

The plaintiff also argued that the appellate decision makes no sense, as most prohibited transactions occur via contract.

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