Border to Coast steps up scrutiny of external managers over voting and ESG integration

UK Local Government Pension Scheme pool provides insight into ESG component of asset manager selection process.

Border to Coast is stepping up its scrutiny of external managers on RI issues and voting, as it revealed it had to engage with a manager over poor-quality reporting.

The UK Local Government Pension Scheme member, which has £38.3 billion ($46.4 billion; €45.8 billion) of assets under management, controls its own voting through segregated mandates. However, Jane Firth, its head of responsible investment, said it still monitored how managers were voting with their own managed assets “because that enables us to see how aligned we actually are with our managers on particular voting issues”.

She added: “Asset owners need to make sure that when they’re appointing managers, they’re aligned with their views”.

Border to Coast is monitoring managers’ voting patterns as it toughens up its own voting stance. For this year’s proxy season, the LGPS pool escalated its climate change policy from voting against chairs based on Transition Pathway Initiative scores to voting against chairs at companies performing poorly on the Climate Action 100+ benchmark. This resulted in votes against 14 chairs at high-emitting companies.

Another area where the pool is escalating voting is on transition plans. Last year Border to Coast decided to “give companies the benefit of the doubt to a degree” on climate transition plans, Firth said, but this year it voted against the majority of climate transition plans put forward by companies.

Manager selection methodology

Firth also provided insight into the ESG component of Border to Coast’s manager selection process.

The pool has a two-tier approach to screening managers based on their RI credentials. Initially, prospective managers are asked to fill out a dedicated responsible investment section. This is then assessed by the RI team, who also look at how ESG is integrated in other sections of the application, such as portfolio construction. As with non-ESG areas, any manager who scores zero will be eliminated from contention.

Shortlisted managers are invited to fill out a “deep dive” RI questionnaire on their ESG integration – Firth said that Border to Coast “wants to lift every stone and have a good feel and understanding of what managers are doing”.

Managers are invited to a call with the RI team, in addition to the main interview. Research analysts and portfolio managers are expected to attend along with their ESG team, so that Border to Coast “can really understand the process that they undertake when looking at [ESG] risks and opportunities”.

Once managers have been selected, they have to demonstrate continued high quality. Each quarter, the pool sends out a reporting template for managers to complete.

“What we had found was that there is such a disparity in reporting from external managers that we needed something consistent, so that we could evaluate our managers on a consistent basis,” Firth said.

Managers are asked about a range of topics, including their engagements, new investments or divestments, and how ESG was factored into these decisions. On a yearly basis, managers also have to fill out a longer questionnaire and attend another meeting with the RI team.

Poorly performing managers can expect to be challenged. In the case of one, which Firth declined to name, “it became apparent over a couple of quarters that the reporting wasn’t the quality that we were expecting or hoping for”, and its response to the annual review was also “disappointing”. When the issues were raised with the manager, it was “incredibly responsive”, Firth said, adding that Border to Coast has seen a “marked improvement” in reporting.

“It’s about a partnership with external managers,” she said. “It’s in that external manger’s interest as well to improve its reporting, because it’s not just us that are asking for things. Other clients need this information as well”.