The financial services industry created accessible, diversified and low-cost financial products, to fulfil the needs of both individual investors and billion-pound pension funds. These products, like mutual funds, are generally considered great inventions. However, these products have to lead to significant intermediation and a tendency to 'pass the buck' when it comes to complex activities like stewardship. That is, voting on and engaging with the companies into which our money is invested.
Historically, stakeholders along the investment chain have shied away from or delegated these responsibilities as company "ownership" became more diluted and distant. Now, with the tidal wave of ESG action and intent, it feels as though everystakeholder wants those responsibilities back. The upside potential of conducting good stewardship includes better investment returns, unique selling points and marketing benefits, as well as a better planet with happier communities, of course. Stewardship forces through changes right at the top of the real economy, at the level of the company board - the recent Exxon vote to elect new climate-friendly directors is one example of many. Whatever their agenda, stakeholders want more leverage and oversight on issues like climate, human rights, racial diversity and gender that their investee companies are dealing. And by stakeholders, I mean everyone from the fund manager who is actually managing the money, to the trustees and wealth managers in the middle, and the ISA savers and pension members whose money is actually being invested in the first place.
In pensions specifically, where the stakeholders are numerous, the conversation is moving very quickly. At its pinnacle, Guy Opperman, the UK's Pensions Minister, has set up the Taskforce on Pension Scheme Voting Implementation, with a focused remit to help trustees and in-house pension teams stay in control of their shareholder rights. He says:
"The investment chain is very long and very tangled, but ultimately you, as trustees of pension schemes, are the asset owners at the end of that chain. And when you act, the ownership chain gets tighter. That means better governance of firms in the real economy, more sustainable value creation and better outcomes for your savers.”
Lots of barriers get in the way of trustee stewardship: the legal structures of pooled funds; the disparate nature of asset managers in defined benefit schemes (as opposed to defined contribution schemes); the multi-faceted and non-standardised reporting by asset managers and companies; and the lack of resources devoted to stewardship. Technology, including tools like Tumelo and AMX, is tearing down these barriers.
Another development in pension stewardship, the rise of a "beneficiary preference", will carry shareholder democracy one step further. The FCA, FRC, UN PRI and Stewardship Code are all talking about the importance of pension members' opinions when it comes to stewardship:
‘Enhanced disclosures from fund managers will give asset owners key information which will empower them to select asset managers based on alignment with their own and their beneficiaries’ interests, and to hold fund managers to account on their stewardship.’*
Last month, the PRI (the world's leading proponent of responsible investment; with 450 investor signatories representing over $40 trillion in assets) suggested that asset owners should obtain the broad values that beneficiaries want to guide investment decision-making; that asset owners and their service providers should translate those preferences into investment decisions; and that beneficiaries should be informed of how their preferences are being applied and the changes this has led to.
This is not just about shareholder democracy though, the PRI also noted the tangible benefits to involving members in the stewardship of their pensions:
- Increased contributions
- Beneficiary satisfaction leading to the building of trust
- A competitive edge appealing to beneficiaries who value sustainability
- The understanding of changes and trends in consumer preferences
- Protection of reputation and defence against critical campaigns
- Increased beneficiary financial literacy.
Member engagement is not free or without risk, however, we see the benefits massively outweighing the costs already with new-age investing apps like Cushon (who offer the world's first Net Zero pension) and Tickr (an impact investing app). Tickr has gained hundreds of thousands of users over the last 18 months, 90% of them first-time investors with an impressive, 50:50 gender split. This is not just about sustainability. Engagement improves financial outcomes for people who don't understand the power of investment.
Pension power in practice
Let's take a step back: why do we want stewardship to be transformed? And how is stewardship transformative?
Jeff Sommer wrote a great post in the NYT last weekend titled: A Glimpse of a Future With True Shareholder Democracy. His point was that, with the rise in popularity of the mutual fund, the big mutual fund managers (Blackrock, State Street, LGIM) "own" increasingly large chunks of publicly traded companies, leaving fund investors without a vote or a say. Soon, the three largest fund managers will own over 51% of the companies in the S&P 500. They will have controlling stakes in the companies that shape our everyday lives and our futures, like Exxon, Amazon and Facebook.
The last month has been a landmark for stewardship. ExxonMobil elected two new "climate-friendly" directors following a campaign by activist hedgefund Engine No. 1, with the backing of pension funds who have claimed back their stewardship responsibilities and listened to their beneficiaries, including CalSTRS, CalPERS and the New York State Common Retirement Fund. These directors will accelerate Exxon's climate transition trajectory, shaping our everyday lives and our futures for the better. Meanwhile, Chevron was forced to cut emissions as a result of a 61% vote in favour of a Follow This proposal. And this year, it hasn't just been climate. It's been workers' rights and gender equality and public health - stewardship, responsible ownership, is reshaping the world.
These events are proof that pension schemes and their beneficiaries have the power not just to dream about but to force a different future, a better future, with their savings. And a better financial outcome with that as well.