Quilter Cheviot, the wealth manager, has announced the completion of the third phase of its long-term investment trust thematic engagement, focused on Real Estate Investment Trusts (REITs).
During this third phase, Quilter Cheviot met with a selection of the chairs, senior independent directors, investment committee members and non-executive directors of eight REITs and three open ended property funds.
Quilter Cheviot is working to enhance corporate governance practices and responsible investment disclosures within the investment trust sector, highlighting three key areas:
- Board composition: Ensuring boards are independent, diverse, and possess the right skillset.
- Board effectiveness: Boards should challenge the investment adviser when necessary and be accessible to shareholders.
- Disclosures: Providing pertinent responsible investment disclosures with real-life examples of stewardship and ESG integration.
Board composition
Quilter Cheviot advocates for fully independent boards to best protect shareholder interests. The firm prefers boards without manager representatives unless they are executive directors of internally managed funds, as this can present a conflict of interest.
During the engagement, Quilter Cheviot encountered a REIT board with a non-independent director who was a manager representative.
Oli Creasey, property analyst at Quilter Cheviot, commented, “While the experience and value provided by manager representatives are acknowledged, we believe that maintaining board independence results in the best outcomes for shareholders.”
Following the engagement, Quilter Cheviot formally reiterated its preference for fully independent boards. The firm is committed to working collaboratively with boards but is prepared to escalate to voting against certain directors if progress is not made.
Oli Creasey, said: “The standards of governance between closed and open-ended vehicles were very different. Open-ended fund boards tended to be harder to get in touch with, showed less diversity, and had directors who served on dozens of boards at a time. This contrast underscores the need for robust governance practices in all investment vehicles to ensure accountability and effective oversight.”
On diversity, the report found that the average female directorship representation among REITs was 46%, compared to 41% for investment companies in 2023, according to an AIC report. Only one REIT did not comply with ethnic diversity guidelines. Surprisingly, one chair commented during an engagement, whilst discussing his efforts in promoting women, “I’m not scared of women.”
Board effectiveness
Quilter Cheviot emphasises the importance of effective communication between boards and shareholders.
Oli Creasey, noted, “Open communication is essential for the symbiotic relationship between boards and investors. Managers should facilitate this dialogue and not impede it.”
The engagement revealed that while most boards are effective, some investment advisers were reluctant to arrange meetings with the chair without their presence or wanted pre-calls before doing so. These instances, though rare, highlight the need for improved board practices and effectiveness.
Responsible investment disclosures
REITs have made significant strides in ESG-related disclosures, but there is still room for improvement. Quilter Cheviot found that while many investment trusts report ESG integration post-acquisition, there is a notable lack of transparency in the due diligence process prior to acquiring new assets.
Ramón Secades, responsible investment analyst at Quilter Cheviot, stated, “Effective disclosure can be achieved through various platforms, with sustainability reports serving as a viable alternative to traditional, lengthier annual reports. The social impact of property investments cannot be overlooked, and strong social practices can mitigate reputational risks and contribute positively to communities.”
The report also highlighted the importance of incorporating frameworks like GRESB to assess and improve ESG performance, although direct disclosure remains crucial. With the advent of the Sustainability Disclosure Requirements (SDR) rules in the UK, Quilter Cheviot will explore how these might affect ESG-related disclosures with third-party managers.
Oli Creasey, property analyst at Quilter Cheviot, adds:
“Maintaining the independence of the board will result in the best outcome for shareholders. Our engagement with REITs has shown that while there is progress, there is still work to be done to ensure boards are fully independent and effective.”
Ramón Secades, responsible investment analyst at Quilter Cheviot, adds:
“Open communication between boards and investors is the cornerstone of the sector. Our engagement has highlighted the need for managers to facilitate this dialogue and not impede it, ensuring that investors can have independent discussions with the board.”
