UK: Investor stewardship and new PLSA guidance for pension funds

PLSA Stewardship and Voting Guidelines 2024

The UK's Pension and Lifetime Savings Association (PLSA) has published updated Stewardship and Voting Guidelines for 2024. The guidance advises pension fund trustees, investment managers and other institutional investors on how to carry out their stewardship responsibilities, including through the exercise of their votes at annual general meetings of listed investee companies. 

The PLSA’s new guidance notes that the UK government is currently focussed on the growth and reform of the financial markets but wishes to see these objectives achieved alongside a continuing focus on responsible investment. To that end, the updated guidance incudes new commentary on topical issues, including climate change and sustainability, biodiversity and the importance of taking account of social factors. More details of the specific recommendations in these areas for pension funds and for listed companies are set out below.

UK pension funds, and their asset managers and investee companies, will want to consider the new PLSA guidance in the context of the wider debate about investor stewardship in the UK. Now that the new Corporate Governance Code has been issued, the FRC is due to review the UK Stewardship Code this year, in line with its current policy of promoting competitiveness and growth, as well as high standards of audit, reporting and governance. 

UK Asset Owner Roundtable

Separately, certain asset managers, including those involved in the UK Asset Owner Roundtable have been considering whether, when it comes to climate risks, the short-term interests of asset managers may be overriding the long-term interests of pension funds. 

A stewardship review, which was published in November 2023, considers insights into misalignment trends, voting rationales and types of engagement by looking at voting by fund managers in oil and gas company AGMs over a number of years. Further research is recommended, but potential reasons for the gaps identified by the review include cultural misalignment between UK and non-UK based asset owners and asset managers, resourcing issues, misunderstandings related to fiduciary duties, disagreements about stewardship processes and potential conflicts of interest.

FMLC paper on fiduciary duties 

When it comes to questions related to fiduciary duties, the Financial Markets Law Committee (FMLC) has also recently published its views on legal issues pension fund trustees should consider when setting investment strategy and taking decisions in line with their fiduciary duties. This is not intended to provide legal advice but to assist with discussions on capital allocation in the context of long-term sustainability and climate change issues. 

The role of the FMLC is to identify issues of legal uncertainty or misunderstanding, present and future, in the framework of the wholesale financial markets which might give rise to material risks and to consider how such issues should be addressed.

The conclusions of the FMLC are broadly consistent with our view on the interaction between ESG issues and trustee duties: pension scheme trustees must exercise their powers for their proper purpose, and in an investment context that is to act in the best financial interests of scheme members. However, very often that duty and ESG considerations will align entirely and there will be no conflict between them – in fact, taking into account ESG factors will often be in members’ best financial interests. Furthermore, trustees can take into account other relevant considerations – including ESG factors – provided doing so does not detract from their fiduciary duty.

PLSA and TPR: climate change and sustainability

According to a PLSA survey from Q4 2023, more than two-thirds of pension funds have a commitment to net zero alignment in place (68%), up from just over half (57%) in May 2022.

Minerva Analytics, in the 2023 proxy voting season, also found that results for ESG-focused resolutions were mixed with more shareholder proposals but lower support, and regional variations. This reflected regional circumstances such as filing rules and anti-ESG sentiment. However, the PLSA argues that shareholders are considering a wider range of issues when voting on director elections and factoring in ESG oversight in voting decisions.

Investors are reminded in the updated PLSA guidance that smaller and medium sized companies should be allowed some discretion and flexibility regarding their choice of framework, approach and timescales. Nevertheless, their focus on climate reporting should remain the expectation.

The Pensions Regulator (TPR) has suggested trustees should familiarise themselves with recommendations from the  Transition Plan Taskforce (TPT), the Taskforce for Nature-related Financial Disclosures (TNFD) and the Taskforce for Social Factors (TSF). This formed part of a wider call from TPR for trustees to continue improving their understanding of wider material ESG considerations. 

TPR also flagged the importance of transition plans in providing a pathway to achieve sustainable investment. It noted that good transition plans could support trustees in integrating risks and opportunities into investment valuations, and improving data to make informed investment decisions – thereby increasing capital allocation to climate solutions.

PLSA and TPR: biodiversity

The PLSA suggests in its updated guidance that pension schemes should begin to treat biodiversity with the same prominence given to climate change. 

This can mean taking a variety of actions, including the following:

• taking biodiversity and natural capital impacts into account in assessments of a company’s transition plans;
• considering voting to support resolutions at general meetings that seek to encourage companies to address direct or underlying drivers of biodiversity loss;
• considering voting against directors where efforts to address drivers of biodiversity loss (such as deforestation) are deemed insufficient;
• encouraging investee companies in at-risk sectors to engage with the TNFD on approaches to better integrate impact on nature into decision-making, as well as on approaches to identify and access biodiversity data; and
• working closely with asset managers to understand their biodiversity-related risk assessments, as well as their engagement strategies with investee companies, and capital allocation to nature-positive initiatives.

The PLSA’s recommendations for good company behaviour in relation to biodiversity and nature include the following:

• The company has produced a summary of biodiversity impacts caused by its activities in its “corporate scope of biodiversity influence” and has a list of goals and objectives that can be focused, and against which company biodiversity performance can be measured.
• The company has developed strategic and monitoring plans describing indicators to be used and mapping out how data will be collected, when, how, where and by whom.
• The company has, or plans to create, a database of relevant data on indicators, and monitoring and reporting systems which ensure data is provided in a standardised format that can be displayed in appropriate data products, such as maps and dashboards, to meet decision-makers’ needs at each level of the company.

TPR has also recommended pension scheme trustees should consider becoming early adopters of the TNFD. 

PLSA: social factors and the workforce

A new section in the PLSA’s guidance stresses the importance of social issues, including modern slavery assessments, but acknowledges that it is difficult for investors to model the impact of social factors because pension schemes normally use asset and liability modelling, with a focus on more “traditional” factors, and social factors do not lend themselves to this type of modelling.

According to the PLSA, currently, the 17 Sustainable Development Goals (SDGs) are the most commonly used impact performance measurement tool, with investors looking at impacts on one or more of the goals, such as promoting inclusive economic growth or gender equality.

Whilst it is hard to measure the impact of social factors, the PLSA notes that there is a range of data that could be standardised and compared across investment portfolios. Investors should, according to the PLSA, look at investee companies’ Annual Reports to gather data on the number of full-time equivalent employee roles, the proportion of those who are paid a living wage, the employee turnover and the proportion of workforce on ‘zero hour” contracts.

In addition, the PLSA’s list of factors amounting to good company behaviour in these circumstances includes:

• Contributions to improving social and economic conditions in local communities where the company operates.
• Applying a social lens to markets where the company operates which allows it to identify new sources of customer value.
• Investment in the current workforce, which will allow companies to develop the talent they need for the future by investing in employee learning and development.
• Enhancing supply chain resilience by building socially responsible relationships with suppliers, to ensure fair and equitable practices.
• Reporting through the Workforce Disclosure Initiative (WDI), which allows companies to demonstrate to their investors, clients and other stakeholders that they are effectively managing their staff and supply chain workers.
• Practising ethical behaviour and social responsibility, which can be promoted through codes of conduct, transparency and accountability.
• Clear reference to and use of credible social risks mitigation measurement frameworks in the Annual Report and Accounts and/or Sustainability Report. This could include reference to the UN Global Compact – Sustainable Development Goals, Global Reporting Initiative, or other established third-party frameworks. Companies should provide explanations as to the rationale for their choice of framework and the extent to which, if at all, relevant metrics have been blended with others. Smaller and medium sized companies should be allowed some discretion and flexibility regarding their choice of framework and timescales.
• Companies taking into consideration social factors in all of their activities, including the products and services they offer. Businesses should ensure that their products and services do not pose safety risks, and/or minimize the exposure to geopolitical conflicts in their supply chains. Companies should also consider wider social considerations in relation to future demographic or consumer changes and how these relate to their products and services.
• Publishing a clear commitment to promoting a culture of openness on mental health, with the CEO signalling leadership commitment on this area.

When it comes to voting, the PLSA advises that investors should start by engaging in these topics and promoting best practices which companies should follow. However, due to the lack of a global framework of principles, data and metrics, and standards on social factors, voting against a company on this topic should be a decision taken only if all engagement avenues have been exhausted.