How smaller schemes can flex their shareholder muscles
Pension scheme trustees have long faced criticism for a lack of stewardship over their investments.
As shareholders they have been accused of being asleep at the wheel when it comes to corporate governance.
Some trustees of smaller schemes, who are attempting to take forward responsible investment policies, have been advised that they are simply too small to get involved in setting environmental, social and corporate governance policies.
The Law Commission has swung the argument the other way, making clear that trustees in fulfilment of their fiduciary duty should take financially material ESG issues into account when considering their investments.
A situation in which the owners of £2.2tn effectively have no control over engagement and voting is utterly untenable and flies in the face of the Law Commission’s report and the countless exhortations from government for trustees to take their responsibilities as asset owners seriously
Lack of control
But even with that new weapon in their armoury, there is still a major obstacle in the way: pooled funds.
Of the £5tn of assets under management in the UK, £2.2tn is in pooled funds.
Those managers have been reluctant to allow the investors to direct how the votes associated with their investments should be cast, arguing that handling
multiple instructions is too difficult.
Most pension schemes fall into this category.
A situation in which the owners of £2.2tn effectively have no control over engagement and voting is utterly untenable, and flies in the face of the Law Commission’s report and the countless exhortations from government for trustees to take their responsibilities as asset owners seriously.
In the absence of any other solutions, over the past two years the Association of Member Nominated Trustees has developed its own: Red Line Voting.
The red lines are a set of tightly drawn voting instructions covering the range of ESG issues.
Pension schemes will be invited to adopt some or all of them as they wish and instruct their fund managers to engage and vote in compliance with them.
The asset managers are at liberty to vote contrary to the red lines, but in doing so they will be required to explain their actions to the client
Climate change
The corporate governance policies are derived from the consensus between the largest pension schemes’ engagement and voting policies.
The environmental and social policies are based on the principles of the United Nations Global Compact; climate change is at the heart of our environment red lines, which were drafted with advice from the Carbon Disclosure Project.
The AMNT has worked closely with the UK Sustainable Investment and Finance Association and, through them, has consulted widely among fund managers, proxy voting companies, pensions consultants and many others.
Technical support has come from the Department for Business, Innovation and Skills.
It has never been more important for all pension schemes to adopt and implement policies covering not just corporate governance, but also social and environmental issues.
Red Line Voting will bring to the pensions industry a ready-made, easy-to-understand policy on climate change.
Investors cannot bank on long-term investment returns if global temperatures rise by 4°C: scientists predict, for example, that Canary Wharf and Manhattan would go underwater along with Bangladesh, creating 200m refugees.
Trustees should be paying more than lip service to these global issues and be truly active shareholders.
Red Line Voting will enable thousands of small and medium-sized pension schemes to do so for the first time.
Janice Turner is founding co-chair of the Association of Member Nominated Trustees and leads the Red Line Voting initiative