Trustee body AMNT shifts focus of Red Line Voting initiative amid fund manager resistance

The Association of Member Nominated Trustees (AMNT), the UK body for pension fund trustees representing £650bn (€720bn) in assets, has shifted the focus of its Red Line Voting (RLV) initiative – a set of voting instructions on ESG issues – citing both resistance from fund managers and inertia from asset owners.

The AMNT, which has just secured a further two years’ worth of funding from the Joseph Rowntree Charitable Trust, has re-focused its efforts on the investment chain to investment consultants, as it seeks to tackle the barriers inhibiting the adoption of Red Line Voting.

The initiative was launched in December 2015 with the backing of former Business Secretary Vince Cable.

It’s a comply-or-explain initiative designed to give asset owners access to a standardised set of instructions on ESG issues that they could direct their investment managers to follow when voting at annual meetings of UK-listed companies, or explain why they had not.

It was devised to counter what was perceived as the disenfranchisement of smaller UK pension funds, particularly those invested in pooled funds, that lacked the means to develop and impose their own ESG beliefs on managers.

Leanne Clements, the former responsible investment responsible investment manager at the Pension Protection Fund, the West Midlands Pension Fund and London Pensions Fund Authority who is Campaign Manager for RLV, told RI: “Due to the issues that we have encountered in getting fund managers to adopt Red Line Voting, our campaign focus has shifted over the past year to addressing the systemic barriers to stewardship that are preventing it adoption, and a large part of that focus has been and will continue to be investment consultants.”

Clements, who joined the AMNT in March 2017, told RI that from the outset she was confronted with resistance from fund managers as well as “some inertia” from UK pension fund trustees.

Asset managers, she said, were reluctant to support the initiative due to the perceived complexity and cost entailed in applying the Red Lines, particularly around splitting the votes on pooled funds, which they saw as an implication of the initiative.

George Latham is Managing Director at WHEB Asset Management, one of the few UK fund manager that supports the project, believes there has been confusion within the industry on the issue of pooled funds.

“I can see how it seems a bit complicated,” Latham said, “but because you have the comply-or-explain element, you don’t need to do that [split the vote]… a pooled fund could vote to the Red Lines but if they think it is the wrong thing to do in a particular instance, say why it is wrong and vote accordingly.”

Clements agreed that there has been some “misinterpretation” in the fund management community about how RLV should be implemented, with some saying that the voting instructions were too “prescriptive” and did not allow for company engagement.

However, Clements said the told RI that the RLV implementation guidance was clear on the initiative’s comply-or-explain approach, adding that engagement would be a perfectly reasonable explanation for not immediately voting against a company.But, she said, irrespective of the pushback from the fund management community, the AMNT is “driven by the principle that asset owners have the right to have their ESG policy implemented, especially in light of recent ESG guidance by the Pensions Regulator”.

In 2016, The Pensions Regulator (TPR) published its new code of conduct, giving its guidance that trustees of UK pension funds should consider ESG factors when making investment decisions, where such factors are “financially significant”.

Latham said that resistance from managers had slowed the adoption of RLV and said that it was a concern if “clients are asking for something and providers are saying no”.

When asked what that says about the power dynamic in the industry, Latham said: “To me, it doesn’t give a good message.”

He added, however, that the key to moving fund managers on RLV could be via mandates, stating: “I genuinely don’t believe you would get that many asset managers refusing to pitch [for a mandate] because of the work involved to do RLV… the cost of doing it is really not that high and once it is done, it is done.”

But Latham said it had proved more difficult than envisaged to get trustees to adopt RLV.

Before it was launched RLV received overwhelming-backing from the AMNT’s 700+ members when put to a vote.

On trustees, Clements acknowledged that the “buck does ultimately stop with them” and that if all the AMNT’s members adopted RLV “I wouldn’t be here”.

But she also called for more understanding of trustees’ predicament, seeing it as vital in arriving at a solution to the problem.

Janice Turner, founding co-chair of AMNT, also defended trustees, saying: “If the financial services industry blames trustee inertia they are ignoring their own role in creating this problem.”

“Trustees of all but the largest schemes have been in a position until this year where there was little guidance from the Pensions Regulator in this area… there was no leadership from most investment consultants at trustee board level; advisers did not put responsible investment on the board agenda of the majority of pension scheme trustee boards…and even if a trustee board somehow managed against all the odds to adopt a voting policy the fund manager refused to accept it. It is therefore hardly surprising that trustee boards have found it difficult to engage with this issue.”

She said that to date, 500 asset owners’ UK equity investments have voted in accordance with RLV.

Now the focus is on consultants, as part of a year-long campaign. Sixteen firms have agreed to raise awareness with their clients about the ESG guidance from the regulator. As Turner says, the RLV campaign “has no intention of going away”. Indeed, it is on the agenda at the next AMNT event this month.

“We will not stop this campaign until we have won the right for the small to medium, resource constrained and externally managed asset owner to set and implement their own stewardship policies.”