Case Study: Corporate Sole Trustee ESG Beliefs

These principles apply specifically where The Law Debenture Pension Trust Corporation plc (LDPTC) acts as corporate sole trustee.  Where it acts as co-trustee it works with its fellow trustees to develop beliefs on behalf of the whole trustee board.

Environmental, Social and Governance (ESG) beliefs

In selecting investments LDPTC believes that ESG matters can be financially material.  In particular LDPTC believes that:

given global commitments to transition to a low carbon economy, as well as the risk that actions taken to limit global warming are too little too late (and result in future temperatures increasing beyond 2 degrees above pre-industrial levels), both transition and physical risks may have a detrimental impact on future returns and are risks that need to be managed;
environmental risks extend beyond carbon management and that companies having a negative impact in other areas (eg biodiversity loss, water pollution, etc) may also underperform as a result of reputational risk, consumer behaviour and government action;
there is sufficient evidence of a link between strong governance practices and a company’s ability to create sustainable value, that governance factors should be taken into consideration in investing and engagement activities;
the link between a company’s behaviours in relation to social factors and its financial performance may be more difficult to evidence, but even so failures of social responsibilities can lead to financial detriment, eg through lower productivity of a dissatisfied workforce, labour strikes, reputational issues and penalties from negative impact on local communities or failings within the supply chain to meet standards on such matters as modern slavery.
As a consequence, pension schemes should invest in strategies where the Investment Manager takes such matters into consideration, either through their engagement strategy or, in the case of active fund management, additionally through their stock selection.

Engagement and Engagement Priorities

LDPTC recognises the importance of being a responsible owner of capital.  It believes it is important that there is engagement on ESG matters with investments held on behalf of schemes where it is trustee.  LDPTC would usually expect its appointed fund managers to carry out this engagement on its behalf and will seek to appoint fund managers whose approach to engagement is consistent with its beliefs.

Engagement should be prioritised where there is likely a material financial risk or opportunity.  As at the last review of this beliefs policy, LDPTC recognised the following as engagement priorities:

carbon emissions and related climate issues
corporate activity to the detriment of biodiversity
labour standards and in particular Diversity, Equity and Inclusion (DEI) and modern slavery are considered a governance priority
suitable executive remuneration structures, aligning board interests with those of stakeholders
Fund managers should be able to evidence that, as far as is relevant, they have engaged with their investments on these matters.  This engagement should extend beyond equity holdings and include companies in corporate bond mandates as well as other assets eg engagement with tenants of commercial property.

Voting and significant votes

Within equity mandates LDPTC believes that fund managers should seek to vote on 100% of resolutions. However, LDPTC recognises that some votes will be more significant than others, based on their likely financial materiality. 

LDPTC views the votes on the following as matters that would be a significant vote:

any matter when they relate to one of a scheme’s 10 largest holdings
shareholder resolutions on climate related policies and activities that would result in significant biodiversity loss
Company proposals that would be at odds with the expectations of the UK Corporate Governance Code (to the extent that compliance would be reasonable in the market in question). This would include, but is not limited to, matters of excessive or inappropriate executive remuneration; issues relating to board make up (including DEI, lack of term limits and lack of chair independence) and ineffective audits.

Engagement versus Capital Allocation

In most ESG matters, LDPTC favours increased engagement over divestment, while accepting there are circumstances where an exclusionary approach may be appropriate, for example:

Where despite repeated attempts at engagement, a company shows no indication that it will seek to improve its practices;
Catastrophic failings within a company eg material or repeated breaches of the voluntary UN Global Compact initiative;
Where political risks cause a related investment risk and/or there are sanctions applied.
In the context of a passively managed fund, subject to suitable diversification, it may be appropriate to adjust a constituent’s index weight by ESG factors, such as its carbon emissions, in order to manage thematic risks (and seek to deliver better risk adjusted returns).

Identifying Climate and other ESG related investment opportunities

ESG is not solely about managing investment risks.  Attractive investment opportunities may also exist e.g. investing in infrastructure that supports the transition to a greener economy is a potential growth opportunity.