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Trustees are being asked to either seek their members’ views about ESG matters or to justify why they haven’t. This sounds easy, but most certainly isn't.
There are lots of issues here. First, how can trustees be confident that the views they hearing are representative? Engagement levels are generally too low to give any confidence.
Also, how should trustees respond to different groups of members with opposing views?
Third, how should trustees react to strongly held member views which they believe are in conflict with the trustees' fiduciary duty?
Most trustees haven’t sought member views to date, so these challenges typically remain theoretic rather than real. But it seems highly unlikely the regulatory status quo will persist, and trustees would be well advised to think through these challenges before they have to confront them.
It’s going to be easier to manage these issues in the context of investment engagement and the trustees' stewardship policy than in the context of investment strategy and exclusions.
Trial shows the practical issues with seeking member views
At RBS, we piloted the Tumelo member voting app earlier in 2020. Tumelo encourages members to express their (advisory) voting preferences on resolutions they are interested in, at AGMs of the companies in which they are invested.
The potential conflicts between member views I mentioned were indeed revealed during the pilot. While for some votes there were overwhelming majorities for a particular proposal, on others the members' opinion was split more or less 50/50. Given that split voting on pooled pension funds isn’t generally possible, it’s inevitable that where opinions are divided, some members won’t see the vote going their way.
Pleasingly, provided members were given a clear explanation of why their fund manager voted the way they did, the reaction from these members was generally positive.
In the longer term, facilitating member mandated split voting on pooled funds could remove this potential issue and improve empowerment.
In the meantime, both trustees and fund managers can use this better understanding of member priorities to inform the focus of their own stewardship policies and where to focus inevitably limited engagement resource.
I am excited by the ability of a voting app to help trustees better understand members’ ESG views and manage the inevitable emergence of divergent views in the context of stewardship and engagement, and so I will be working with Tumelo in 2021.
Guidance needed on reconciling fiduciary duty and member views
Managing conflicting views in the context of default fund investment decisions seems far trickier.
Take Tesla as an example. For many members, Tesla might represent a key driver of a successful climate transition and would be a must-hold stock. Other members, whose primary focus might be good governance, conditions in the Tesla workplace, or concerns about the environmental damage of lithium mining, might want it excluded. Fiduciaries might be concerned about risks being skewed to the downside, given current valuations of Tesla.
It would be enormously helpful for fiduciaries if the regulator, as and when it shifts towards requiring us to consult our members, explicitly acknowledged the likelihood of member investment preferences coming into conflict with fiduciary views and offered guidance as to how these might be best reconciled.
In closing I would like to thank Nick Spencer at Gordian Advice, who provided lots of insight during a long and interesting conversation on the topic this summer.
