Hold companies to account on climate change, say new PLSA voting guidelines for pension schemes

Pension fund investors must be prepared to hold the directors of the companies in which they invest individually accountable on how well they manage climate change risks, the Pensions and Lifetime Savings Association (PLSA) has stated in its updated annual Stewardship Guide and Voting Guidelines.

The guidelines are an important resource for pension trustees, providing practical guidance for schemes considering how to exercise their vote at annual general meetings. 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.

The updated guidance is intended to be a practical, step-by-step check list, and includes an easy to use table (page 61), which summarises voting recommendations on issues including executive remuneration, audit, company leadership and dividend policy.

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.

The guide says investors should consider voting against the re-election of the responsible Director or the re-election of the Chair if:

• Shareholders have attempted to engage on the issue and yet companies have still failed to demonstrate effective Board ownership, for example providing a detailed risk assessment and response to the effect of climate change on the business, or incorporating appropriate expertise on the board.

• The business is large, and is not already moving towards disclosures consistent with Taskforce for Climate Related Financial Disclosure (TCFD), Carbon Disclosure Project (CDP), Sustainability Accounting Standards Board (SASB) or another established third party framework, and smaller businesses are not readying themselves at a pace proportional to the resources available.

• The business has operations which are highly carbon intensive and has not made sufficient progress in providing the market with investment relevant climate disclosures including committing to publish science-based targets.

• The company has not listened to investor concerns about any direct or indirect corporate lobbying activity whose objectives are considered to frustrate climate change mitigation.

• The company has not responded appropriately to the result of a climate change related resolution, whether binding or not, and whether it was actually passed or not.

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, says: “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.”