Satisfying market demand
12 July 2023
Demi Derem, general manager for international investor communication solutions at Broadridge, discusses the increased demand for investor engagement and pass-through voting in light of Broadridge’s latest whitepaper
Image: Broadridge
Broadridge’s recent whitepaper, ‘Pass-through Voting: Granting a voice to the investor community in the passive investment space’, outlines the importance for retail and institutional investors of having their voices heard when it comes to funds’ operations.
“Pass-through voting is a very interesting space,” Derem begins. “The Capital Markets Union is all about greater participation of investors, and the Shareholder Rights Directive was all about giving retail participants a voice.”
Historically, he says, if retail investors have been given any ability to vote on funds’ decisions “it’s been quite passive.” But now, change is in the air. What’s driven this interest, and what can firms do to satisfy market demands?
Why now?
A combination of increased ESG awareness and the impact of the COVID-19 pandemic is part of the reason for the shift, Derem says. “COVID-19 made people mindful of a number of things that they weren’t previously focused on,” he explains. “Whether it’s quality of life or what we’re doing to the planet, there’s a population awareness of ESG-related issues.”
Now, investors are increasingly wanting their voices heard when it comes to ESG.
Regulatory drives are also encouraging firms to lean into pass-through voting. Although not yet law, these are indicative of what’s to come — and a nudge to the industry to have a plan in place. Regulators “aren’t defining exactly how banks and investment managers need to incorporate the opinions of underlying investors, but they’re certainly saying that there needs to be something in place to do so,” Derem says. With pressure from both sides, widespread adoption seems imminently likely.
Governance-related voting is already a fiduciary responsibility for institutions, seen as part of the process of investing in a fund. Currently, many large asset managers are ‘torn’ between these responsibilities and a growing desire to take environmental and social issues into consideration, Derem says. It can often be difficult to align these goals; after all, the primary role of a manager is to generate returns for investors. As this conflict continues, will financial growth remain the primary driver of behaviour, or will there be a shift to more conscious investments? “Whoever strikes the right balance between the traditional responsibility of generating wealth for an investor while also including the opinions of the majority of investors” will come out on top, Derem affirms.
Gathering opinions
When it comes to gathering investor opinions, there are multiple approaches that funds can take. One solution is the use of questionnaires, conducted at the point of investor onboarding in addition to the usual risk appetite analysis. ESG sentiment, like synthetic risk ratio, can be mapped to an individual to determine their preferences, Derem explains.
However, there’s one method of obtaining investor sentiment that Derem believes will stand head and shoulders above the rest — once someone invents it.
“The most granular way of representing underlying equities in a particular fund is by asking your investors ‘what do you think about these themes’ each time there’s an issuer meeting for that fund,” he begins. But this is easier said than done, with investors not inclined to go through each complex, individual resolution or undergo a lengthy process to share their views; “If people need to understand the intricacies of the industry in order to vote, then they never will. They’ll never express their opinions”.
Derem highlights the need of grabbing investors’ attention. “People are subscribed to so many things that sifting through emails to figure out what they need to do to vote is not going to work,” he says. Instead, he suggests that firms use simple notifications to get information to investors. “One sentence gives you the information you need, and you decide ‘am I for or against that?’,” he summarises. “Swipe left or right, and move on.”
“There’s a lot of work involved in boiling down a set of resolutions into a very simplistic ‘yes-or-no’ choice, and there’s a cost associated with it,” Derem acknowledges, “but it would be the most enhanced, sophisticated way of incorporating investor opinions.”
While it may be a considerable outlay, Derem stresses that “this is a long game.” Those who start developing and implementing systems now will be better prepared for the next two decades, even if adoption rates are initially low. “We’re just starting the journey around exploring the possible technologies out there; there’s going to be a massive J curve in adoption rates.”
Generation green
Another reason for the increased interest in investor participation is the entry of a new generation into the marketplace, beginning to earn income and deciding where their investments would be best placed. “This younger generation is more mindful of the planet, and has a greater social awareness,” Derem reports. “An issuer having a bad carbon footprint, or poor employee diversity, or a gender pay gap — these things are important,” he explains.
In order for real change to be made, the majority of participants need to be in agreement on their intentions. “We have to reach a tipping point, and I think we’re at that tipping point now,” Derem says. The combination of young people’s desire to contribute to real, positive change along with the general public’s engagement with environmental and social issues means that “interest in ESG is not going to go away,” Derem predicts. “It’s certainly going to be here for the next 20 years, and I think the volume is just going to get louder.”
Looking ahead
Considering wider industry opinion, “I come across people who are more pessimistic than optimistic,” Derem says. For his part, “I’m not optimistic or pessimistic. I’ve just looked at the facts. My job is to think about what the next 10 years is going to look like,” he adds, “and if firms are interested in selling to younger generations they’ll need to change the way they think.”
Broadridge’s whitepaper “recognises the growth in funds, the regulatory change, changes in investor sentiment and the generation gap,” Derem summarises. If funds aren’t offering investor preference inclusion in their voting processes, demonstrating an awareness of the issues that investors care about, then they’ll be less appealing to potential clients. “This is blindingly obvious to anyone who is an outside observer,” Derem concludes. Taking investor preferences into account is a necessity. The question now is: who will do it best?
“Pass-through voting is a very interesting space,” Derem begins. “The Capital Markets Union is all about greater participation of investors, and the Shareholder Rights Directive was all about giving retail participants a voice.”
Historically, he says, if retail investors have been given any ability to vote on funds’ decisions “it’s been quite passive.” But now, change is in the air. What’s driven this interest, and what can firms do to satisfy market demands?
Why now?
A combination of increased ESG awareness and the impact of the COVID-19 pandemic is part of the reason for the shift, Derem says. “COVID-19 made people mindful of a number of things that they weren’t previously focused on,” he explains. “Whether it’s quality of life or what we’re doing to the planet, there’s a population awareness of ESG-related issues.”
Now, investors are increasingly wanting their voices heard when it comes to ESG.
Regulatory drives are also encouraging firms to lean into pass-through voting. Although not yet law, these are indicative of what’s to come — and a nudge to the industry to have a plan in place. Regulators “aren’t defining exactly how banks and investment managers need to incorporate the opinions of underlying investors, but they’re certainly saying that there needs to be something in place to do so,” Derem says. With pressure from both sides, widespread adoption seems imminently likely.
Governance-related voting is already a fiduciary responsibility for institutions, seen as part of the process of investing in a fund. Currently, many large asset managers are ‘torn’ between these responsibilities and a growing desire to take environmental and social issues into consideration, Derem says. It can often be difficult to align these goals; after all, the primary role of a manager is to generate returns for investors. As this conflict continues, will financial growth remain the primary driver of behaviour, or will there be a shift to more conscious investments? “Whoever strikes the right balance between the traditional responsibility of generating wealth for an investor while also including the opinions of the majority of investors” will come out on top, Derem affirms.
Gathering opinions
When it comes to gathering investor opinions, there are multiple approaches that funds can take. One solution is the use of questionnaires, conducted at the point of investor onboarding in addition to the usual risk appetite analysis. ESG sentiment, like synthetic risk ratio, can be mapped to an individual to determine their preferences, Derem explains.
However, there’s one method of obtaining investor sentiment that Derem believes will stand head and shoulders above the rest — once someone invents it.
“The most granular way of representing underlying equities in a particular fund is by asking your investors ‘what do you think about these themes’ each time there’s an issuer meeting for that fund,” he begins. But this is easier said than done, with investors not inclined to go through each complex, individual resolution or undergo a lengthy process to share their views; “If people need to understand the intricacies of the industry in order to vote, then they never will. They’ll never express their opinions”.
Derem highlights the need of grabbing investors’ attention. “People are subscribed to so many things that sifting through emails to figure out what they need to do to vote is not going to work,” he says. Instead, he suggests that firms use simple notifications to get information to investors. “One sentence gives you the information you need, and you decide ‘am I for or against that?’,” he summarises. “Swipe left or right, and move on.”
“There’s a lot of work involved in boiling down a set of resolutions into a very simplistic ‘yes-or-no’ choice, and there’s a cost associated with it,” Derem acknowledges, “but it would be the most enhanced, sophisticated way of incorporating investor opinions.”
While it may be a considerable outlay, Derem stresses that “this is a long game.” Those who start developing and implementing systems now will be better prepared for the next two decades, even if adoption rates are initially low. “We’re just starting the journey around exploring the possible technologies out there; there’s going to be a massive J curve in adoption rates.”
Generation green
Another reason for the increased interest in investor participation is the entry of a new generation into the marketplace, beginning to earn income and deciding where their investments would be best placed. “This younger generation is more mindful of the planet, and has a greater social awareness,” Derem reports. “An issuer having a bad carbon footprint, or poor employee diversity, or a gender pay gap — these things are important,” he explains.
In order for real change to be made, the majority of participants need to be in agreement on their intentions. “We have to reach a tipping point, and I think we’re at that tipping point now,” Derem says. The combination of young people’s desire to contribute to real, positive change along with the general public’s engagement with environmental and social issues means that “interest in ESG is not going to go away,” Derem predicts. “It’s certainly going to be here for the next 20 years, and I think the volume is just going to get louder.”
Looking ahead
Considering wider industry opinion, “I come across people who are more pessimistic than optimistic,” Derem says. For his part, “I’m not optimistic or pessimistic. I’ve just looked at the facts. My job is to think about what the next 10 years is going to look like,” he adds, “and if firms are interested in selling to younger generations they’ll need to change the way they think.”
Broadridge’s whitepaper “recognises the growth in funds, the regulatory change, changes in investor sentiment and the generation gap,” Derem summarises. If funds aren’t offering investor preference inclusion in their voting processes, demonstrating an awareness of the issues that investors care about, then they’ll be less appealing to potential clients. “This is blindingly obvious to anyone who is an outside observer,” Derem concludes. Taking investor preferences into account is a necessity. The question now is: who will do it best?
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
