Op-Ed: The UK Association for Member Nominated Trustees (AMNT): Red Lines – why, what are they, how will they work?

AMNT members at pension funds with £350bn in assets this week voted to approve a new set of ESG voting instructions for their fund managers.

This week, members of the Association for Member Nominated Trustees (AMNT) approved our major asset owner initiative, Red Line Voting. It’s taken two years to get to this point. So what is it about?
It is about protecting investments. It’s about ensuring that the companies we invest in on the UK stock market provide our beneficiaries with the best possible long-term sustainable return on investments.
Trustee boards are responsible for investment decisions and they have a fiduciary duty – a responsibility to act in the best interests of their beneficiaries – to secure the best realistic return over the long-term, given the need to control for risks. But we can’t just place our investments and then monitor their returns, like an absentee landlord. And that attitude mirrors the findings of successive reports like the Kay Review and code drafters that have been asking more of trustees. What they want us to do is adopt responsible investment policies.
Responsible investment means adopting environmental, social and corporate governance policies with regard to the companies in which we invest. These policies lay down the standards and behaviour we expect companies to abide by. Fund managers engage with companies on our behalf with regard to these policies and exercise our shareholder votes on our behalf at AGMs in accordance with how the companies are abiding by these policies.
It’s not ethical investment, which means taking decisions about which companies to invest in, or divest from, on the basis of ethical concerns. Red Line Voting has nothing to do with this. The Red Line policies aim to assist our trustees in getting the best long-term, sustainable outcome for the companies that their fund managers invest in.
So how did we develop the Red Lines?
We started by researching how many pension schemes actually have responsible investment policies. We came to three conclusions:
First, generally only the biggest pension schemes – over £1-billion – are really actively involved in responsible investment, engaging with companies either directly or through informed asset manager intermediaries.
The medium sized schemes – between £100-million and £1-billion – may sign up to codes and principles such as the NAPF Voting Guidelines but we feel they leave it there – that is too soon in the process which is left incomplete.They leave the engagement and voting to their fund managers to vote according to those guidelines. We question how many actually close the loop by holding the fund managers to account for the decisions they have taken?
The smallest schemes generally play no role at all, relying on the fund managers to engage and vote, or not, as they see fit. Some have been told by their professional advisers that they are too small to play any role at all in responsible investment. This is outrageous because our small pension schemes under £100m between them total around £300bn in assets.
Second, we found that even where a pension scheme said it did have a responsible investment policy, just about all of them only had a policy on corporate governance and no social or environmental policy. The NAPF voting and engagement guidelines contain no social or environmental policy. No-one knows how many of the thousands of pension schemes have, for example, an environmental policy, but if someone told me it was less than 50 I’d believe them.
Third, one of the main reasons for such a lack of active responsible investment is that most pension schemes invest in pooled funds, and the fund managers are generally reluctant to allow investors in those funds to direct how their votes should be cast. Pooled funds, of course, are where your pension scheme pools its money with other investors and the fund invests in companies instead of your scheme investing directly. When you find out how much money is invested in the UK you begin to see the scale of this problem. The Investment Association says there are £5-trillion of assets under management in the UK. Of this nearly half of it – nearly £2.5-trillion – is in pooled funds. That’s £2.5-trillion of assets whose owners, including pension schemes, in effect cannot direct how their votes should be cast.
We are the asset owners. We own these assets on behalf of our members. It’s our money: the law makes that quite clear and with that comes the burden of being held accountable. Accountability without power sums up the position too many of our members feel they are in and it’s a poor place to be. And we agree with the government that it is in our members’ interests, for a better long-term outcome for our investments, that we must all assert our
right to play an active role in the responsible stewardship of our assets. The fact is that a growing number of trustees are no longer willing to just sit there watching the value of their investments slide, as big companies are caught fixing Libor rates, accidentally misreporting their revenues and a catalogue of other scandals, and unable to have any say over those companies’ governance. This has to change.
Red Line voting is our solution to this problem.
The Red Lines are a set of voting instructions, not guidelines, covering a wide range of ESG issues. They will apply to every UK stock market listed company in which the pension scheme invests. We will be encouraging the widest adoption of the Red Lines by pension schemes of all sizes including – especially – those investing in pooled funds. They will instruct their fund managers to comply with the Red Lines when voting at corporate meetings.
Fund managers may vote contrary to the Red Lines if they believe, in individual cases, that this is the best course of action and if they do they are required to explain to their asset owners why they did so. Comply and explain is central to the idea. For the ESG specialists at the good fund managers the Red Lines are good news: we believe that the existence of a Red Line instruction will confirm to the management at fund managers that their clients want responsible investment; the Red Lines will empower their teams. And for those good people, where they enjoy the trust of the client, comply and explain will allow them to pursue their work and to evolve their relations with companies. Red Line Voting makes it easy for the fund managers of pooled funds. We hope they will receive dozens of instructions – but, importantly, they will all be the same instructions.
So how did we arrive at these Red Lines?
We devised the governance Red Lines by studying the voting and engagement policies of some of our largest pension schemes, with assets totalling around £130-billion, and drafting the Red Lines mostly based on the consensus we found which in turn is in fulfilment of the Financial Reporting Council’s UK Corporate Governance Code. We were advised by major fund managers who have an excellent track record on responsible investment that we could base our social and governance Red Lines on the ten principles of the United Nations Global Compact, which is in itself based on many globally endorsed international declarations and conventions.Within this we were also very keen to reflect as far as possible the major public concerns for which pension schemes are increasingly seen as having a role to play, such as extremely low pay and poor conditions, and climate change. It is extremely important that for the Red Lines to work in practice they must make it as easy as possible for the fund managers to use, so we have designed them with this in mind: they must be workable. They must be very specific. If this is the case, you vote that way. A Red Line that allows too much room for interpretation may result in its implementation in a way other than that intended. Where an ESG professional believes a vote contrary to the Red Line is needed then the comply-or-explain facility is there to allow it.
On social policy, our Red Lines are in accordance with the Global Compact principles which include specifically the elimination of discrimination in employment, respect for human rights and the effective recognition of the right to collective bargaining.
On the environment, we have worked closely with the CDP. Through our research on climate change we have realised that it has never been more important that we all adopt our five Red Lines on the environment.
This is not an all or nothing list of Red Lines. They are a menu which every pension scheme can choose from: it can adopt all of them, or just some of them, or none of them. If you disagree with one or two, you and your pension scheme have the choice of omitting them.
I’m sure that some will spot areas that are missing or are only brief. But we have done the best we can and have been privileged to receive the advice and guidance of many companies in the financial services and pensions industry. We intend to launch our Red Lines this autumn, and revise them at a suitable time, maybe a year later. But the industry press has already stated that our initiative is “a major innovation in UK pension funds” and that Red Line Voting “looks set to empower trustees to make responsible investment a reality.” And that is why we started down this road. In the 21st century it is no longer acceptable for the asset owners of, between them, trillions of pounds to be unable to direct how their votes are cast. We hope that with Red Line Voting this will begin to change.

Janice Turner is Co-Chair of the AMNT