UKworkplace pension schemes have the potential to drive radical change at companies across the globe on a range of environmental and social issues, and there’s a growing band of employees willing it to happen.
So says Georgia Stewart, CEO and co-founder of Tumelo, the fintech that enables DC pension scheme members, in their capacity of shareholders, to have a voice on how the companies they invest in are run.
“Asset owners need to realise their untapped power and take advantage of the technological developments now available to them.” Her comments might elicit a ‘well she would say that’ response, given Tumelo sells technology platforms to pension schemes to help them manage their stewardship requirements.
But Stewart is quick to point out that her comments aren’t just the pipe dream of a millennial eco-advocate: this action, and influence, has already started to happen she says.
“Across the industry NGOs, fund managers and pension funds are realising they can drive change through shareholder engagement. A month ago in Australia a bunch of pension funds got together and decided enough was enough when it came to AGL, the country’s biggest fossil fuel company, which is responsible for 8 per cent of its carbon footprint. Working together they voted four directors off the board and replaced them with directors that were experts in renewables from Tesla’s board.”
She adds: “I don’t think those running UK pension funds currently get out of bed and think, maybe we could replace the board of a FTSE100 company today. But I do think we are moving in that direction. Shareholder engagement is very, very powerful when you put the right pieces together.”
Stewart is confident that the tech products offered by Tumelo will form part of this jigsaw. The fintech now offers pension schemes two technology platforms — one which allows members an indicative vote on a range of ESG issues, and a newer offering for trustees and scheme managers, designed to help them manage their stewardship requirements.
These platforms are separate but designed to work in tandem, enabling trustees, and their consultants, to see how members would vote on specific shareholder proposals, and how the various fund managers running specific parts of the portfolio actually are voting on these issues.
Stewart explains: “The stewardship platform is a more complex version of the member platform. It allows trustees to look at a whole range of ESG themes that are more detailed than on the member platform.
“It also contains details of a whole range of AGM votes, not just the shareholder proposals and CEO pay votes.
“With this information a trustee could, for example, see how much Tesla is owned in a particular fund or across the scheme as a whole. The shareholder platform shows the proportion of members who have engaged, for example, with the issue of water use at Tesla, and support shareholder proposals to reduce this.
“They will be able to use this information to decide how they might want to vote as a scheme. Crucially they will be also able to see how all the fund managers they use have voted on this issue.”
Stewart says this process has been aided by recent changes to the way fund managers allow asset owners to vote at company AGMs — described as “game-changing”. Stewart explains: “In the past the status quo was that asset owners had no control over individual votes unless they were big enough to have a segregated mandate, and only the very largest schemes would have had this option.”
As she points out segregated mandates are more costly to run, so for workplace pension schemes, with a keen eye on costs, the default has typically been to use lower cost index funds, where assets are pooled with those of other schemes and asset owners. This leaves schemes essentially beholden to how fund managers vote at company AGMs, where there may be little regard taken of scheme or member wishes.
“But in the last year the biggest US fund managers, including BlackRock, State Street Global Advisors and Vanguard have started to let asset owners, primarily pension funds, start to take control of voting within pooled funds.
“This ‘pass through’ voting — sometimes known as split voting — offers the same functionality as a segregated mandate when it comes to voting, but with the cost and convenience that a pooled fund offers.”
So managers like BlackRock might cast a number of votes on behalf of individual asset owners, rather than one ‘block’ vote she says. “Theoretically this means schemes will be able to vote differently, according to their own objectives even if they are all in the same pooled fund.”
Although this initiative comes from the US, it applies to UK asset owners using these fund management groups. Scottish Widows, for example has recently set up pass-through voting with BlackRock and says it is in the process of putting in place similar arrangements with SSGA.
“I think we’ll see other fund managers following suit this year. Some will do passive or pass-through voting where they’ll say, OK if you care you can have the vote we will delegate that to you. And some will say we don’t want to fully delegate the vote but we want your opinion, so they’ll let asset owners be more involved in the process. Asset owners will be able to hold the fund manager accountable, far more than they have before.”
Stewart says this follows work by the Department of Work and Pensions Taskforce for Pension Scheme Voting Implementation, the Occupational Pension Schemes Group and groups like Share Action. “Pension funds cannot blindly invest with a fund manager and cross their fingers that they are voting in the longer-term interests of many of these asset owners.”
Data coming through Tumelo’s stewardship platform shows how frequently there is a misalignment between a scheme’s Statement of Investment Principles and a fund manager’s voting record.
Many larger schemes have a proxy adviser to vote on their behalf for segregated mandates. Tumelo has looked at these vote recommendations and compared them to how pension scheme would have voted if they were able to control a portion of the pooled funds they invest in. Looking at data from 14,963 proposals in 2022, Tumelo found that the fund manager’s vote was different to the proxy adviser’s recommendation in around a third of these cases. There was a similar 29 per cent misalignment when looking at the difference between a pension scheme’s recommendation and the fund manager’s vote. This misalignment rose to 45 per cent on proposals around climate change and 70 per cent when looking at annual remuneration — although both were far smaller sample sizes.
Stewart says that consultants have a key role to play when it comes to helping trustees with these stewardship duties. “The stewardship platform is for the trustees but we think it will be used primarily by the consultants. Consultants need to know that there is a great piece of analysis they can do to support schemes and trustees. Is the scheme aligned to climate goals? Well, if so how are the fund managers you used voting on proposals concerning climate change?
“Using this data they will be able to see how fund managers voted on a range of issues and quickly spot any outliers. The consultant, or the trustee, is then better equipped to have a conversation with that manager, and get their point of view across in representation of the scheme.
“The other piece that ties this all together is the reporting. Trustees and consultants now have to do a lot of reporting around stewardship, and platforms like ours can pull through a lot of data for them. So they could look at how the various fund managers used have voted on CEO pay at, for example, BP Group. All this might sound very nuanced but that’s exactly the data trustees need to be putting in their implementation statement reports. It’s also the type of information fund managers need to be supplying for the PRI certifications. They need to show they are listening to their asset owners and the beneficiaries.”
Stewart says she expects these changes will lead to more demand for the company’s products and platforms, and it will continue to develop technology solutions to complement its suite of products. It is still a relatively new company. Stewart, and her co-founders started working on Tumelo in 2018 while at Cambridge University, campaigning for its pension scheme to become more sustainable. It launched the member platform in 2020 with NatWest’s pension scheme and their fund manager LGIM. The stewardship platform launched last year with Fidelity.
Stewart says the company now works with most of the master trust providers in the UK, including Aon, Willis Towers Watson, Standard Life and Aviva as well as Fidelity and L&G.
Recent Corporate Adviser research among consultancy firms found many believe issues around sustainability and ESG are useful engagement tools — although it is unclear whether this necessarily leads to greater engagement on other pension issues. But some consultants were concerned that platforms like Tumelo’s might create unrealistic expectations, as these indicative votes do not necessarily lead to any change in voting behaviour.
Stewart says that this is a “fair challenge” but one the company aims to address through effective education and information. “I think a huge part of the value that we deliver is helping members see which funds and companies their pension is invested in. The shareholder platform helps them see the issues that are coming up at the various companies, and they can tailor this to areas they are interested in.”
Stewart says the platform enables members to engage on specific issues that are voted on at AGMs — rather than simply surveying members for views on, for example, climate change. “They get to see what issues shareholders are raising, for example whether Walmart should ban single-use plastics. They will also get context around this, not only why a shareholder has raised this but why WalMart thinks it should not be voted on. The member doesn’t vote themselves but they are able to send their opinion to the scheme managers which should influence how the fund managers will vote.”
Stewart says that Tumelo’s technology doesn’t just let trustees know the numbers voting for or against on any particular proposal. “This platform creates a database of member views, allowing consultants to analyse which issues engage most people, which don’t, and which are the most contentious issues around which there is no majority consensus. They can also drill down to look at different membership profiles: what do female members or younger members care most strongly about for example.”
She says members are increasingly interested in social issues, not just climate change. “They may have a sustainable pension — but there will still be shareholder proposals on workers’ rights issues at Amazon, for example and chief executive pay remains an issue at pretty much every single company in the S&P 500. These are issues people should be engaged in, not only because it affects their pension but because it can have a huge influence on different facets of their everyday lives — be it community housing or supply chains, to macro political issues like the war in Ukraine.”
Stewart says there is considerable diversity when it comes to looking at member views on ESG issues. “We have definitely seen that with climate change. Although it is the topic de jour for many people, it doesn’t resonate as well with those working in the gig economy. Socio-economic background can also reflect how strongly people care about issues like CEO pay, workers’ rights and gender equality.
“The other thing we have noticed is that people across the board care massively about animal welfare, and it’s a topic that is rarely talked about in sustainable investment. But I think this is likely to come back on the agenda, as it’s linked to sustainable farming, healthy food and veganism, particularly with the trend we’ve seen towards lab-grown meat and alternative milks. I would say the public are very, very interested in those issues and we would expect to see that in the voting responses as well.”
She says that this might be more effective with the new emphasis on stewardship, rather than negative screening. “Part of the problem is the older school of ESG relied heavily on negative screening: we don’t like coal mines, we don’t like tobacco, let’s take them out. But animal welfare is such a cross-cutting issue, that can affect companies in farming, consumer goods, food, retail, fashion and so on. This is one of the great things about stewardship, it can help can drive better practices and good corporate governance on these specific issues.”
Stewardship she says will continue to grow in importance to DC workplace schemes, aided by better reporting practices, new pass-through voting facilities and, of course, technology solutions.