Transforming ESG Investment Strategies with Proxy Voting Data

From climate change to social issues, investors are increasingly turning to their portfolios to make an impact and reflect their personal philosophies and preferences. But getting the right portfolio alignment, and identifying sustainable investment opportunities, requires a vital resource – insightful data.

As Director of Stewardship Research and Policy, Lindsey Stewart, CFA, is no stranger to the power of impactful environmental, social, and governance (ESG) data. Amidst a range of cutting-edge research interests, such as the interaction between companies and institutional investors on areas including policy and ESG topics, there is one area that Stewart is particularly focused on.

“My investment research centres primarily on proxy voting data”, Stewart notes. “To put it simply, this is information about a company and how their shareholders vote on a range of issues, and, as my research spotlights, how they specifically respond to ESG issues.”

But the world of ESG data can be a vast and confusing space, made more so by its increasing prominence across the financial services industry. Enter Stewart. “While ESG data can be incredibly broad in scope, my investment research is concerned with environmental and social themes, and how attitudes towards them are reflected via proxy voting data. On the environmental side, my research encompasses climate, nature, and biodiversity, while the social aspect focuses on workforce issues, political influence, the demographics of a board of directors, and the ethical use of technology such as artificial intelligence (AI), among a wide range of themes.”

As investors demand greater transparency about the real-world issues shareholders vote on, and how asset managers engage with these firms, it’s clear proxy voting data is a powerful asset. As Stewart notes, “proxy voting data is fascinating as it’s one of the strongest quantitative signals as to the types of issues asset managers want to prioritise in their investments. Certainly, they have a variety of objectives. They want to compare funds, measure fund performance, identify emerging investment opportunities, and conduct portfolio analysis.

But increasingly, proxy voting data has become an effective way to highlight how asset managers respond to important topics, from climate change to social issues. Ultimately, for an end investor, this heightened transparency around an asset manager’s ethos or outlook allows them to decide whether they are aligned in their values, which will have clear ramifications on how their portfolios are constructed.”

As investors use proxy voting to take a stand on the world’s most pressing issues, research into this space is crucial to forging a path forward. While shareholders battle it out in the boardroom, for Stewart, the devil is in the details, or more accurately, in the data.

“When it comes to sourcing proxy voting data, my first port of call is always the database in Morningstar Direct. The Direct platform pulls in the data feeds from the Securities and Exchange Commission (SEC) filings. These filings form the foundation of my research process.

From the SEC proxy voting data, I can comb through the US landscape to identify potential topics of interest. It can be something as simple as a series of questions. Which companies have abandoned climate-related pledges? How do different board members vote? How are shareholders responding to financial regulations? What are the different board demographics? Who has the largest stake? What are the different vested interests at play?

It's this proxy voting data that sparks the initial idea, which then becomes a hypothesis. From there, I move deeper into the world of Direct, to search for data that substantiates or refutes my hypothesis. It’s here when things tend to get interesting.”

Interesting? Absolutely. Simple? Not so much. As Stewart reflects, proxy voting research is not without its challenges.

“The primary challenge with proxy voting research is the difficulty in cross-referencing. So, finding out which vote came from which shareholder, which is essential for deriving any meaningful insight. While proxy voting data gives me that initial starting point, finding the right data to back up any claims can be frustrating.

This is compounded by how time-intensive the process can be. Sifting through the data feeds, sourcing information about who the fund managers are, board demographics, committee chairs and so on is incredibly time-consuming. It’s about connecting all the dots with data, which requires substantial effort.”

For Stewart, the answers to his problems could all be found in Morningstar Direct.

“Morningstar’s proxy voting database does a lot of the heavy lifting now by collating vast pools of data from public filings. To do this manually as an individual would be incredibly time-consuming. Using this alongside the capabilities of Direct, we’re able to really focus on the research and pull-out valuable insights. It allows us to stay competitive as things move so swiftly in the ESG space. The quicker we’re able to disseminate our investment research publicly, the better the outcome for clients and end investors.

The ease with which we can source the data is remarkable, but I’m continually impressed by the scope and quality of the data. There are so many data points to explore, so when it comes to connecting those dots I spoke about, we’re able to do this much more confidently. Our datasets are continually expanding, which is especially exciting when I think about the future of proxy voting, ESG, and climate data. As more data becomes available – for example, reported data on scope 3 carbon emissions – the quality is set to get better.

I think there’s a certain level of rigour and robustness that’s just inherent to the platform. The blend of public and private data, and third-party and proprietary data allows us to explore an array of investment universes.

The proxy voting data provides a solid foundation, but from there I’m able to dig deeper and add insights unique to Morningstar. With additional datasets, we can supplement the proxy voting data with proprietary analytics and metrics. For example, we have the Morningstar Medalist Ratings or Sustainability ratings. These components add an extra layer to the data, turning it from insightful to actionable. This is all done with transparency in mind, so when we add our insights and metrics, it’s clear to see how the analysts arrived at a decision regarding a particular investment fund.”

When it comes to thinking about the future of proxy voting research, and of the world at large, the impact, as Stewart notes, is clear.

“Asset owners are some of the biggest beneficiaries of this type of research. Our reports give them the tools and knowledge to tailor their investment strategies to their clients’ preferences, which is hugely important as individual and retail investors increasingly consider ESG and climate implications when selecting an investment fund.”

While the ESG space is vast and ever-expanding, Stewart is keen to condense his mission into one concise statement. “Creating a better and more sustainable outcome for the end investor is our North Star. Our proxy voting data is objective and insightful, and really facilitates empowered decision-making when it comes to investing, allows investors to make their voices heard, and ensures their portfolios are aligned with their sustainability objectives.”

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Lindsey Stewart has not received any cash or non-cash compensation from Morningstar, directly or indirectly, in exchange for this story.