The Blog

Active Ownership Can Help Rebuild Public Trust in Savings

This week investors across the UK will mark Ownership Day - an initiative dedicated to encouraging investors to be 'active owners' of the companies they invest in.

What does being an active owner mean? Anyone with pension savings, stocks and shares ISAs, a unit trust or other investments is technically a part-owner of the companies those savings are invested in. Active ownership means that a fund doesn't just invest in the likes of BP, Barclays and Vodafone then takes a 'back seat', but instead that it takes responsibility to use its shareholder power and make its voice heard on those issues that can improve the long-term value of the company.

Active ownership is a win:win for investors. There is clear evidence that it encourages more long-term sustainable behaviour by companies, and that this in turn leads to better value and improved long-term returns for investors. For example, since 2010 Aviva Investors has engaged with mining firm Vedanta Resources to raise concerns regarding the company's performance on a range of business relevant environmental and human rights issue, especially in India. Aviva argue that since the beginning of 2010, Vedanta's share price has underperformed its peers by 29%, and that this can be partly attributed to a lack of focus on such issues.

Award-winning research co-authored by London Business School Professor Elroy Dimson analysed investor engagement with US companies over ten years to 2009 and found that share prices rose by an average of 4.4% in the year after an engagement was concluded. The research concluded that companies tended to experience improvements in operating performance, profitability, efficiency and governance following active ownership by shareholders.

Growth of active ownership

This financial driver is one of the reasons that active ownership has becoming increasingly popular among institutional investors in recent years. Over £800 billion of assets are invested this way in the UK and over 200 asset managers, including 30 of the biggest, have now signed the Stewardship Code - a set of Principles supported by the Government to encourage active ownership by institutional investors.

A survey of pension funds last year (by the National Association of Pension Funds) found a near consensus (96%) behind the belief that as institutional investors they should have stewardship responsibilities in the companies they invest in.

But much more still needs to be done. Only 21 out of 100 individual Local Authority Pension Funds have signed up to the Stewardship Code and there is no reason why all public funds should not sign up or incorporate the Code's expectations within their Statement of Investment Principles.

Benefiting the bottom line and beyond

One of the world's most high-profile active owners is CalPERS (California Public Employees' Retirement system), the largest pension fund in the US. Each year CalPERS engages with a selection of companies (known as their focus list) judged to be performing poorly in areas such as corporate governance. Over a period from 1992-2005, CalPERS calculated that their focus list activism helped create shareholder value of over $3 billion.

The benefits of active ownership extend to wider society too. For example, in 2001 a group of investors in Gap submitted a resolution at the company's AGM asking the company to address poor labour practices within its supply chain in order to avoid its brand becoming at risk from a consumer boycott. This active ownership triggered several years of work that has resulted in steady improvements and now 99% of Gap factories being closely monitored for poor labour standards.

More recently a group of investors joined together to form Carbon Action, an investor-led initiative that engages with companies to make year-on-year emissions reductions, implement carbon reduction emissions and set targets. This targeted engagement has led to more than half of 256 targeted companies setting tougher targets for emissions. Companies with targets have been shown to achieve year-over-year absolute reductions in CO2e of more than double the rate of companies without targets, as-well as being 10% more profitable than those without targets.

Rebuilding public trust

With public opinion of investors at an all time low, more and better shareholder engagement may not be a cure all, but it can be a factor in helping to create more sustainable capital markets.

YouGov research conducted for Ownership Day has shown that almost half of the British public (48%) believe that institutional investors should have stewardship responsibilities in the companies they invest in.

The age of pension funds and others being invisible investors who simply sat back and waited as their assets were managed is passing. If we are to rebuild public trust in savings then we need all major funds in the UK to act as responsible stewards, not absentee landlords. Investors should embrace active ownership and use the information and advice available to them to set the tone for how their funds are managed. Ultimately this is what the public- the people the funds are run for - want.