Whose money is it really? How blockchain technology can give control back to investors

It is easy for asset managers to be complacent and forget that they are purely managers of other people’s money. Although these managers believe that they are acting in the best interests of the fund owners by reading ESG practices, such unit owners cannot vote in company matters or enjoy shareholder benefits.

There has been a trend towards general disagreement between the actual shareholders and the board of directors in listed companies since some people forget whose money it is anyway. By offering digital versions of traditional assets, we can offer greater transparency and inclusion and hopefully more direct engagement with organizations and investors.

More than $112 trillion of assets are held in funds globally. As the chart below shows, there are a handful of asset managers who control large amounts of capital and make decisions on behalf of investors. Unfortunately, the proportion of registered shareholders who vote on listed companies’ decisions is low.

“The information gap is one of the biggest challenges for retail participation in proxy votingGabe Rissman, co-founder of YourStake, is quoted as saying in a CNBC report – YourStake is an ESG and socially responsible investment portfolio analysis and reporting tool for asset managers. This is surely not correct, because with the right technology and the right controls in place should asset managers embrace what their clients really want?

Managers ranked by total worldwide institutional assets under management

(assets in billions as of 31 December 2021)

Source: Pensions and investments

There has been tremendous growth in funds dedicated to environmentally conscious (ESG) investors. In fact, in 2021 alone, global fixed income manager PIMCO saw over 1 trillion ESG-rated bonds issued.

It is clear that there are many investors who are rightly concerned about the environment and want to ensure that their money is invested in ESG-friendly businesses. The dilemma is that there are no global standards for what is, and what is not, an ESG investment.

Measuring the ESG credentials of an organization that has issued an equity or debt instrument is fraught with challenges. For example, do you not invest in petrochemical companies, or do you not lend as a bank to them because they extract/drill for fossil fuels? Yet they are also investing billions of dollars in renewable energy projects, and some, such as the Norwegian firm Statoil, have even changed their names to reflect their emphasis and long-term commitment to renewable energy.

Tesla is another example of a company that may be shunned by some ESG asset managers but embraced by others. True, it builds electric cars, but in doing so has decided to invest in Indonesia to mine nickel, which is unsurprisingly opposed by environmentalists.

The European Securities and Markets Authority recently reported that:

• ESG funds are more oriented towards large stocks, and
• ESG funds are more oriented towards developed economies.

But does this mean there is yet another barrier for small and medium-sized companies to face when it comes to finding investors? Very often it is SMEs that manage to be more ESG responsible as their businesses are less complex and management can have a better macro picture of the business, its suppliers and its customers.

Not only do private investors not have the opportunity to vote on corporate issues related to the companies they own, but they also lose out on shareholder benefits. A number of listed companies are known to offer their shareholders benefits such as perks and rewards, which often enable shareholders to receive discounts on goods and services from the firms they own shares in. In the UK, Hargreaves Lansdown has a list of shareholder benefits and GoBankingRates has also a list of listed companies that offer shareholder benefits. Unfortunately, most asset managers either do not tell investors or cannot pass these benefits on to the holders of their mutual fund clients.

In January 2022, BlackRock CEO Larry Fink warned companies that his fund managers were looking to allocate needed capital “to increase efforts to tackle climate change“. Easy to say when you’re personally worth $1 billion, but certainly harder for individuals and companies struggling to survive.

Do asset managers’ clients really know what decisions fund managers are making on their behalf – for example, agreeing the remuneration and option packages, or whether to invest in a company based on random ESG criteria? Surely BlackRock and other global fund managers who “look after” other people’s money need to find better ways to engage with their investors, and if possible give more control when it comes to voting on corporate issues?

Furthermore, despite our so-called sophisticated stock markets and electronic trading, it is currently impossible to know who the shareholders are in some listed company on any stock exchange during normal working hours. It is only after the stock exchange is closed and the stock registrars have enumerated all buyers and sellers that this can be configured.

All in all, it can present challenges for regulators and even those companies that need to find out which shareholders are entitled to vote or receive dividends. Therefore, it is necessary to select a date for such activities since the relevant shareholder information is not available in real time. Similarly, trades on UK exchanges took 10 working days to settle.

In 2014, the London Stock Exchange went from settling trades in three days to two days. In many other jurisdictions, the settlement also takes two days, while in the US people want to migrate to one day. But why not switch and settle down genuine time?

There is increasing evidence that institutions want to offer digitally packaged, e.g. digital stocks, digital debt instruments, commodities, real estate, mutual funds, etc. A good example of this is the recent announcement that UK fund manager Abrdn (formerly Standard £532 billion Life Abderdeen plc) is investing in Archax a digital asset platform aiming to to create a digital wrapper around some of Aberdeen’s existing mutual funds. Russell Barlow, global head of alternatives at Abrdn, said: “Our view is that the next disruptive event will be the transfer from electronic trading to digital exchanges and trading through digital securities”.

Therefore, there is no reason why holders of income generating investments such as property, shares, bonds etc. cannot receive dividends/coupons/rent on a weekly basis. By using blockchain technology, it should be possible to increase the degree of transparency so that shareholders cannot be given the same privileges as shareholders, and therefore get the benefits and the opportunity to vote on corporate issues.

Since one of the main goals of many regulators is to treat customers fairly, by having access to earnings monthly as opposed to every six months and offering the actual shareholders the opportunity to vote (not to mention the greater transparency of knowing who the shareholders or owners of a property/debt instrument is in near real time) must be attractive.

Indeed, could we see regulators, once they understand the transformational opportunities that digital assets bring, become champions of digital assets as opposed to being reluctant bystanders?

JF