Pension trustees should develop ESG voting policies, says report

The report, produced by the UK’s Association of Member Nominated Trustees (AMNT), also recommends that the Department of Work and Pensions (DWP) should lead a working group to explore the obstacles to trustees voting.

The AMNT highlighted (40 page / 1.9MB PDF) technical, legal, cultural, operational and cost-related hurdles which it said made it difficult for pension scheme trustees to directly implement their voting policies in relation to the underlying investments of pooled funds.

The report noted that recent regulatory developments, alongside the 2020 Stewardship Code, placed more emphasis on trustees developing their own approach to stewardship and not simply delegating responsibility to fund managers without proper oversight. However, it said that trustees often found that managers of pooled funds refused to accept pension schemes’ voting policies, even on a comply or explain basis.

The AMNT said the current system “may no longer be fit for purpose and there is now arguably an emerging governance gap”.

Pensions expert Michael Jones of Pinsent Masons, the law firm behind Out-Law, said the report highlighted an important and fundamental disconnect between reporting and disclosure in relation to investment in pooled funds, focusing on the issue of voting rights.

“Voting is a core component of trustees’ stewardship activities and ensuring that managers invest scheme assets in accordance with trustees’ policies as responsible investors,” Jones said.

“The AMNT highlights that fund managers should report how their own voting policies reflect trustees’ policies. This is important because it reflects trustees’ existing statutory requirements to set out parameters for managers’ engagement with investee companies and stewardship of trustees’ assets. As a first step, trustees need to ensure their expectations of managers extend to voting practices and be clear on what they consider to be significant votes. Only then can they properly review, benchmark and monitor the voting practices of their managers,” Jones said.

Jones said it was notable that the AMNT suggested investment consultants should sign up to the Stewardship Code for service providers, which includes disclosing how effective they have been in serving the best interests of clients and explaining how their services best support clients’ stewardship.

“Trustees should be reviewing their investment consultant objectives in light of recent changes to their statements of investment principles and they should consider implementing these requirements as part of this review,” Jones said.

The report said most pooled fund assets were held by custodians in ‘omnibus accounts’, in which the shares of multiple fund manager clients are registered under one name. This leads to a lack of transparency around who is the beneficial owner and how votes are attributed to those pension schemes. To identify which votes apply to which schemes, managers would need to manually split the vote.

The AMNT said it doubted that the costs of splitting voting were prohibitive, and whether managers’ reluctance to do so was more a function of outdated technology and underinvestment in the stewardship function of many fund managers. It said fund managers should adjust their business models to reflect the new regulatory requirements of their asset owners, and investment in technology could at least partially if not wholly solve the issue.

The report suggested that short-term solutions to the problem should focus on asset owners developing their own voting policies on ESG issues and benchmarking their fund managers’ voting policies against their own. Investment consultants should support them in this.

Fund managers should report on the alignment between their ‘house’ voting policies and those of their clients on a comply or explain basis so that trustees can make informed decisions regarding how aligned they are with their managers. For listed equity assets, in line with the new Stewardship Code, managers should disclose their policy on allowing clients to direct voting in pooled accounts.

In the longer term, the report said the DWP-led working group should be comprised of all parts of the voting chain, with a majority voice from asset owners.

Pensions expert Jack Gillions of Pinsent Masons said: “The report flags the governance gap between what trustees wish, and are expected, to do against the practical and technical difficulties of exercising votes through pooled vehicles. Given the nature of investment through pooled funds, there is a clash between trustees as asset owners and fund managers over who should direct the voting policy of investments.

“The report highlights a particular need for managers and investment consultants to engage with trustees on stewardship and voting. We expect this pressure on managers to find ways to implement more effective split voting methods for trustees will only increase with time, particularly given the clear backing of the AMNT report by the UK pensions minister,” Gillions said.

Carolyn Saunders of Pinsent Masons said the report was part of the effort to better support trustees in managing the risks and opportunities presented by ESG issues.

“The actions outlined in the interim report of the UK’s government-regulator task force on climate-related financial disclosures will also help trustees and others participating in the investment markets to price in climate risk specifically, by driving the production of high quality, decision-useful disclosures relevant to climate change,” Saunders said.