National Pension Service Overhauls Evaluation of Entrusted Asset Managers... 'Actions Speak Louder Than Words' [Click e-Stock]

Meritz: "Shift Toward Qualitative Evaluation Framework"

Emphasis on Actual Outcomes Over Formal Policies

At the regular shareholders' meeting of Hyosung TNC in March, the National Pension Service cast negative votes on several agenda items, including the appointment of Chairman Cho Hyunjoon as an inside director. At the shareholders' meeting of its affiliate, Hyosung Heavy Industries, the National Pension Service's opposition even led to the rejection of an amendment to the articles of incorporation.

This demonstrates how the National Pension Service actively exercises its voting rights regarding companies in which it invests directly, rather than through asset managers. Now, heightened attention is focused on the agency’s decision to apply the same standards to domestic asset management firms (entrusted asset managers) tasked with handling domestic stocks on its behalf.

On July 27, Meritz Securities introduced the “Plan to Introduce a Stewardship Responsibility Activity Implementation Monitoring System,” which was approved by the National Pension Service’s Fund Management Committee on July 2. Meritz Securities forecasted that “the focus of evaluation will shift from whether policies exist to the systematicity and actual execution level of responsible investment activities.”

The evaluation criteria for responsible investment by the National Pension Service will shift from a formal level to a direction that asks for execution and results. Meritz Securities Research Center

“Stewardship responsibility activities” refer to the extent to which asset managers faithfully exercise shareholder rights on behalf of investors. As seen in the Hyosung TNC case, this includes exercising voting rights for or against shareholder meeting agenda items and demanding corporate governance improvements through engagement with companies.

Up until now, the National Pension Service simply checked whether entrusted asset managers had relevant policies and produced responsible investment reports, awarding two additional points for these criteria. With the latest reform, this evaluation will be integrated into the main scoring system for selecting and regularly evaluating entrusted asset managers, within the 100-point full score range.

Jina Lee, a researcher at Meritz Securities, explained, “It is significant that stewardship responsibility activities have shifted from being minor favorable factors to becoming formal evaluation elements used to assess an asset manager’s responsible investment capabilities.”

The previous approach only confirmed the presence of policies and reports, making it difficult to discern how the actual level of stewardship responsibility activities differed among asset managers.

The National Pension Service plans to link these evaluation results to future decisions regarding increasing or withdrawing entrusted funds.

The new evaluation system consists of three areas and seven items. It assesses whether the asset manager has policies in place and implements them systematically, whether it applies consistent voting standards to companies involving conflicts of interest such as affiliates, and, if voting behavior deviated from other institutional investors, whether there were reasonable grounds for those decisions.

Lee noted, “The framework has been overhauled to focus on the actual implementation of stewardship activities and the grounds for such actions, rather than merely the existence of formal policies.” She added, “The National Pension Service’s evaluation focus is shifting from the mere existence of policies to closely examining the process of performing stewardship activities and objectively verifiable evidence supporting them.”

In line with this trend, another major change is scheduled for this year. As sustainability (ESG) disclosures become a legal requirement, the reliability and verification standards for ESG-related information are being strengthened. Lee stated, “Although these are two separate systems, their directionality is the same. The evaluation criteria are shifting away from how much ESG information is provided, toward how reliable it is and how well it is substantiated by actual activities and outcomes.”

Consequently, the nature of reports submitted by entrusted asset managers is inevitably changing. Lee pointed to the “2025 National Pension Fund Stewardship Responsibility Annual Report” published last year as a good reference case, observing, “Rather than simply listing activities, a consistent approach is being applied that explains the process and outcome of stewardship activities through quantitative metrics and comparative benchmarks.”

Examples include presenting and comparing the past three years of voting results, or breaking down negative votes by activity such as director appointments, auditor appointments, amendments to the articles of incorporation, and compensation decisions.

Lee predicted, “Providing consistent grounds for evaluations is becoming more important than simply reporting more activities,” and added, “Reporting results and outcomes in connection with activities will become even more important in the future.” She identified two critical elements entrusted asset managers should faithfully include in their reports: the grounds for their decisions (Evidence) and the actual outcomes (Outcome).

This content was produced with the assistance of AI translation services.