With many UK companies firmly behind the green agenda, there is genuine demand for DC pensions that can demonstrate they are reducing their carbon emissions to meet net zero targets.
Delegates at a recent Corporate Adviser roundtable event at the House of Lords — discussing the findings of the latest ESG in DC Pensions Report — were told that while the industry argues over different metrics and definitions, and prevaricates over league tables, their more forward-looking clients will simply vote with their feet and switch to challenger brands offering pension options with prominent environmentally-friendly credentials.
Amba CEO Tobin Murphy-Coles says his firm works with many late-start firms, typically with around 5,000 employees in the 30 to 40 years bracket.
“It is very clear what members are looking for. They are committed to offsetting or reducing their own carbon emissions To their minds it is an ethical choice that reflects their own business practices and values. It is critical in the war for talent, particularly to bring younger people into the business. And they want their workplace pension to reflect this.”
He said many of the firms he talks to would be “absolutely devastated” by the disagreements within the industry on how to take this agenda forward. “This is a very challenging position for us as an industry.”
Murphy-Coles added that the industry needs more concerted action on ESG issues, particularly in relation to climate change, pointing out that the DC workplace market is now “more mobile that it has ever been”.
“The companies we talk to are prepared to move their pension scheme from established brands to challenger brands based on league tables. Whether the industry likes league tables or not — or are arguing that they are measuring the wrong thing — the fact is that this is what companies are making decisions on.”
The panel discussed the role of stewardship in DC schemes, particularly given the importance of climate change to many employers, and whether this could be an effective way of engaging employees and demonstrating a scheme’s ESG credentials.
Increasingly, a number of schemes are seeking feedback from members on how they would vote on key ESG issues, often using the digital tools provided by companies like Tumelo.
L&G is one of a number of providers to partner with Tumelo and LGIM’s interim head of DC investment Jesal Mistry said this information feeds directly into the work done by the company’s stewardship team.
“It’s been useful to have the voice of the end customer, the end member, when thinking about how we engage with companies and vote on issues. But we’ve also brought in ‘expression of wishes’ forms for trustee bodies too.” He said the information from both of these has led to LGIM’s stewardship team taking a different approach on some issues.
Mistry said all this information is taken into account before LGIM votes at AGMs. However he says it is important LGIM uses its size to cast a single vote as it retains more influence at company meetings this way. This will mean that the vote won’t necessarily reflect the views of all members, or all schemes.
There has been moves recently to facilitate this via split-voting, where an asset manager casts more than one vote to reflect the specific views of particular large asset owners. This can give individual schemes more say, but there are also potential dangers in this approach. Mistry said: “If you start to fragmenting your vote then you risk losing the impact you can have as an asset manager with an individual company.”
Mercer’s head of sustainable investment UK Europe and IMETA Brian Henderson agreed. “You need everybody to come together to vote to get things to change. If you split that down into the fund manager and then the individual asset owners the less powerful it is.”
He said there are some companies, like LGIM, that are doing an excellent job on stewardship. He added that they he would also like to see asset managers, and asset owners work together on key issues to drive change at the corporate level. He cites the example of Nest, which has joined with others to take a class action against a particular company or industry. “This feels quite impactful to me and I think it’s an interesting new angle. It’s almost like saying stewardship is not quite working and therefore we are going to go in with some teeth.”
The panel discussed whether there were potential drawbacks in giving members indicative votes on ESG issues. Might they become less engaged if a vote does not reflect the views they expressed? Cushon adviser Julius Pursaill said evidence suggest this is not a major issue. “There was a lot of concern from trustees about this issue initially. But what has happened is that members are given a lot of feedback on why a voting decision has been made.
“In many cases they have
come back and stated that they had no idea this topic was so complex, and feel they now understand it better as a result. This creates engagement.”
Pursaill added that services like Tumelo can be “excellent” for member engagement, pointing out that 70 per cent of Cushon’s new clients sign up and activate these and other services, and start using them within three months. “If you do it right you can get high levels of member engagement,” he said.
However, Pursaill pointed out there can be tension between trustees and members on some schemes — with trustees feeling it is their fiduciary duty to make these calls, and this shouldn’t be outsourced to members.
Some on the panel thought there were ‘professional people’ working in stewardship who should be making the big calls on these issues. Seeking views from hundreds of thousands of members — who might not fully understand the issues could be a distraction.
However others thought the engagement opportunity this offered was highly valuable, giving members more of a sense of ownership as to how their money was invested.
Mistry said: “When you have a 20,000 workforce you will have very diverse and different views. So how this scheme approaches stewardship might be different from an employer where there’s a more narrow cohort of members, perhaps in terms of age or attitude. Much will depend on the nature and the objectives of what the trust is trying to do — and if they’ve got strong views on something, for example a cancer research charity might have a stance on investments in tobacco – this should be clearly defined.”
LCP partner Nigel Dunn said it is important there is more focus on trustee boards understanding the voting policies of the investment managers they use. “If you’ve got an investment manager which is very much aligned with your own beliefs and the values of members, then this is quite an easy job to review this regularly and make sure their voting record matches your own objectives.”
He pointed out that some schemes may be using US managers, for example, which will be aligning with US regulatory requirements, which may not have the same focus on ESG issues or stewardship. “If you are a UK investor you may want to do something about that,” he said. “I don’t think we can take it for granted that investment managers are voting on the right things.”
Redington’s managing director and head of DC Jonathan Parker agrees, and pointed out there is now far more data available on these issues, and the voting records of asset managers. “Data is the important first step and then you can perhaps identify any rogue managers within the chicken coop.”
Isio head of ESG research Cadi Thomas warns that there are also questions about how reliable the engagement information is from some managers. Again she says there is an element of managers marking their own homework. “It can be hard for trustees and consultants to verify that they’re doing what they said they will do, and whether they are genuinely making a difference by engaging in this way.” She said this is why she thinks trustees need to take more action on stewardship and engagement, rather than simply leaving it to the asset management industry.
Hymans Robertson senior investment consultant Alison Leslie agreed. Leslie said it was important that there was qualitative, rather than just quantitative information about these issues. “I would far rather be dealing with a manager who has 500 really brilliant engagements with companies in their portfolio than one who has 5,000 — but in many of these cases all they have done is written a letter. The type of engagement is important, not the sheer number of companies they are contacting. But context is also very important too, when it comes to looking at voting records.”
Those at the event discussed the action taken by shareholder pressure groups, like Majority Action and ShareAction, which have focused on the voting records of fund managers when it comes to key resolutions.
Willis Towers Watson senior director, investments Marc Bautista pointed out that stewardship encompassed more than simply voting at company AGMs. “It has become increasingly clear to me over the past couple of years that there are a whole range of engagement tools. Voting is not necessarily the most effective one. It is often the last resort, and a lot more effective engagement happens before this point.”
Mistry agreed that it wasn’t just voting that brought about change at a corporate level. The prospect of asset managers ‘naming and shaming’ companies that are failing to meet climate or social issues standards can also be a powerful tool he said in improving corporate behaviour.
The panel thought responsible stewardship was important, but many thought it was not always working as effectively as it could — particularly in relation to climate change issues.
Bautista said: “There are some great examples of stewardship out there, and companies like LGIM are making a difference. But you have to say that across the industry, on a global scale it is not as effective as it needs to be in order to make progress on issues like climate change.”
Those attending the debate agreed that greenwashing remained a challenge for the industry, but opinion was split on whether the vast number of ESG bodies, coalitions, organisations and standard setters was helping or hindering this problem.
Parker said that the fact there are now 280 separate bodies shows this is a “fantastically vibrant and exciting” sector of the investment industry. “You could be very cynical about it. But actually what I read is that there are lots of organisations and individuals with ideas on how to change things, hopefully for the better. Over time this list will reduce, but these organisations are being set up because people are passionate about these issues and things are not happening fast enough.”
Aon senior investment consultant Katherine Patel observed: “We are still very much at the infancy stage and
expectations around ESG are changing.” She said that bigger organisations such as the UN PRI have been instrumental in helping the industry address some of these issues. Many on the panel agreed that bodies like the UN PRI, Climate100 and the IIGCC (Institutional Investors Group on Climate Change) had been instrumental in raising ESG issues and standards across the industry.
Dunn agreed that some bodies, like the UN PRI, can be criticised for having hundreds of members but he pointed out it is still a lengthy process to be accredited. This, he said, shows commitment towards net zero and ESG goals. But Dunn said that given the proliferation of bodies there is a danger some stewardship teams essentially become “report writing teams” completing the various paperwork needed to join and renew membership of these organisations.
Henderson added: “Some of these groups are really informative and helpful and help shape thinking around these complex issues. Organisations like the UN PRI have some validity to them, but others are just agendas — I think people need to tread carefully. With the best of the organisations though it is a collaborative partnership in order to achieve positive impact in the market.”
In many cases these organisations, like wider stewardship initiatives when it comes to company voting, are most effective when there is collaboration, between asset managers and asset owners, pressure groups and the industry, and different ESG organisations and bodies.
Making progress on complex issues like climate change requires companies, sectors and industry to work together. The panel agreed that the best of these ESG bodies look to foster these relationships and should over time drive real change.