Fund managers let down pension savers on ESG — and FCA must act

Public anxiety over climate change is increasing, with July confirmed as the hottest month since records began and the UN ever more shrill about the rising global temperature.

This comes on top of worries about plastic pollution, executive pay, the gender pay gap and ethnic minority representation on company boards.

More pension savers now want to know if their pot is being invested in a way that will ensure sustainability.

In the UK, new regulations put pressure on pension trustees to take a view on environmental, social and governance matters. The idea is simple: if an issue is relevant, they must have a policy to take it into account.

Trustees are expected to take ESG seriously and develop stewardship policies, so that as shareholders they can encourage companies to be better corporate citizens.

While this green revolution is seen as positive, not everyone is pulling in the same direction. Pension schemes pay fund managers to invest their money but that sector seems reluctant to play its part.

Think back to the shareholder spring of 2012 when fund managers told pooled-fund pension schemes that they could not vote over excessive pay. This inspired the Association of Member Nominated Trustees to develop Red Line Voting, an approach to help pension schemes become more active shareholders.

Red Line Voting sets minimum expectations that pension schemes can apply to investee companies. The idea is that fund managers will be required to follow these policies on a comply-or-explain basis.

AMNT liaised with the fund management industry to ensure that best-practice ESG frameworks, such as the UN Global Compact, were used.

It came as a shock, then, when fund managers refused to implement Red Line Voting.

This was remarkable given the demand for trustees to be more active in this area, especially with regard to increased accountability and the aim of greater alignment with socially aware savers — pension scheme members.

How can pension schemes develop robust ESG policies and take savers’ views into account if fund managers are not prepared to listen?

Fund managers tell AMNT they are able to develop their own voting policies, which they believe are sufficient. We recently carried out a review to challenge this assumption.

We examined the policies of 42 of the UK’s best-known fund managers and found that not only did they refuse to accept trustees’ policies in their pooled funds but their own principles bore little relation to what trustees, and many members of the public, would consider best practice.

Of those managers that disclosed a policy, more than half had no guideline on climate change-related voting, nearly a third avoided reference to directors’ gender diversity and nearly three-quarters failed to mention ethnic diversity on boards.

On pay, only a quarter had a voting guideline to tackle excessive overall pay packages, and the vast majority had backed deals for chief executives that were more than 100 times their workers’ average pay.

Several fund managers were not prepared to publicly state a policy on climate change, which shows a lack of accountability to the people whose money they manage.

A storm is brewing, and the clash of interests between trustees and fund managers will escalate.

We therefore urge the Financial Conduct Authority, which oversees fund managers, to propose a remedy that will allow pension scheme trustees to develop policies that fund managers have to implement.

As the clamour grows for financial services to be a force for good, it is time that fund managers realise the cash they manage is not theirs. This money belongs to socially responsible individuals who are saving for retirement, and fund managers’ actions should be in line with savers’ long-term interests.

The sooner they realise this, the faster that companies can become more sustainable and help make the world a better place.

Janice Turner is co-chair of the Association of Member Nominated Trustees


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