Pension fund investors must be prepared to hold the directors of the companies in which they invest accountable on how well they manage climate change risks, the Pensions and Lifetime Savings Association (PLSA) has stated.
The guidelines provide practical guidance for schemes considering how to exercise their vote at annual general meetings for pension trustees.
The guide is especially relevant this year, following new regulations introduced in October 2019 requiring trustees of all schemes understand and disclose how they include financially material ESG factors and undertake stewardship in their investment decision-making.
It also includes a toughened-up section on climate change and sustainability, reflecting pension schemes’ heightened focus on ESG and the growing number of climate-related resolutions tabled at AGMs.
The PLSA believes that climate change is a systemic issue affecting nearly every industry and nearly every firm. Although climate change will impact some sectors more than others, it is likely that most companies will need to assess its impact on their strategy and business model.
New ESG rules already apply to trustees having been implemented during 2019. However, while they are a start, the PLSA has said investors have a fiduciary duty to go beyond mere compliance and they and their asset managers hold directors accountable; which they can do during this AGM season.
Following findings in the recently published PLSA AGM Voting Review that executive remuneration remains a major concern for shareholders, the updated Voting Guidelines also urge investors to consider executive pension contributions, which the PLSA says should be in line with percentages applied to the overall workforce.
Voting to hold relevant directors individually accountable is one of the most effective ways for shareholders to use their vote to effect change. However, investors continue to remain reluctant to do so. The PLSA’s review of the 2019 AGM voting season found that although investors continue to express high levels of significant dissent on remuneration-related votes, this is only rarely accompanied by a vote against the Remuneration Committee Chair or the Chair of the Board.
Schemes have a fiduciary duty to their beneficiaries to act in their interests. This includes acting as a good steward of the assets entrusted to their care and part of that is being unafraid to work with their asset managers to exercise voting rights in a way that sends the clearest possible message to companies that repeatedly fail to respond to legitimate investor concerns.
Caroline Escott, Policy Lead Investment & Stewardship, PLSA, said in a statement: “Pension schemes hold key stakes in FTSE 350 companies and it’s right that they use their influence as owners to encourage companies to behave responsibly. Issues like climate change and executive pay are important for investors as they can significantly influence corporate success and hence the value of individuals’ savings.
“Pension funds are ideally placed to encourage companies to behave in a way that ensures sustainable business success. We would also urge scheme investors to use the 2020 AGM season to hold directors individually accountable on issues of continued concern – doing so can be a powerful tool to effect change. For instance, in cases where schemes feel that the agreed executive pay packages are not aligned to long-term performance, we recommend that pension fund investors vote against the re-election of remuneration committee chairs responsible for pay practices alongside voting against the remuneration policy or report.”
