Why say no to ownership?
Nina Röhrbein asks Martin Clarke, executive director at the UK’s Pension Protection Fund and UKSIF chairman, about ownership duties and opportunities
Nina Röhrbein: Why did the UK Sustainable and Finance Association (UKSIF) decide to hold Ownership Day on 12 March?
Martin Clarke: Responsible ownership has been in the spotlight since the global financial crisis started. Criticism has been directed at asset owners and their agents in financial markets, accusing them of being asleep at the wheel before and during the crisis.
Ownership Day – which was held on 12 March – is a new initiative aiming to raise awareness of the benefits of active ownership strategies, such as the use of shareholder rights to improve the long-term value of a company.
It is an important initiative because a long-term, active ownership strategy not only has the potential to provide superior risk-adjusted returns for pensions and asset owners, but is also in the interests of investment managers, companies and society at large by encouraging a greater focus on effective long-term wealth creation.
Equity owners in particular are positioned at the most vulnerable part of the corporate balance sheet; so why would they not use the rights and privileges they have as part of their investment and risk management strategies?
Through Ownership Day, UKSIF wants to publicise the nature of asset ownership as widely as possible. Ownership Day does not only address those that participate as institutions in this space, but aims to reach out to the ultimate beneficiaries, whether they are retail investors or pension fund members. We would like the asset owners to ask whether their investment managers have an active strategy, whether they vote on company resolutions and whether they engage with companies about their behaviour and environmental, social and governance (ESG) risks.
Ownership Day is about engaging hearts and minds rather than setting hard targets such as the number of asset owners signed up to the PRI principles or the proportion of votes in UK companies exercised, although of course we would like to see those numbers rise too.
NR: Why do a lot of asset owners still not exercise their ownership rights and duties?
MC: Many delegate to their agents, but if your asset manager has simply cut and pasted extracts from the UK Stewardship Code onto its website, it does not mean that ownership is truly being exercised. In my view, it is up to the asset owners to take responsibility. Signing up to a code is a good step but being able to embed the principles of the code in what you do and being able to report back on it to your investors is even better. The code may give the technical framework but implementation, or the degree to which the principles of codes are embedded in the investment process, is something you would expect asset owners to be interested in.
All too often the emphasis in the debate seems to be on the justifications for undertaking responsible ownership as if the default option is not to do any voting or engagement on important issues. As part-owners of the business, we have a say in running that business, and this can be an important way of leveraging influence to improve the business, as well as part of an asset owner’s risk mitigation strategy. So why not do it? Why do we choose to ignore this particular approach?
Another issue is the delegation of ownership duties to the fund manager. To what extent have asset owners examined the validity of their fund managers’ investment processes, including the degree to which they look after ESG risks and engage with investee companies to know that the owner’s interests are being well represented throughout the investment chain.
NR: How important is responsible ownership to the UK’s Pension Protection Fund?
MC: In its investment principles, PPF states that it takes ESG issues seriously. The monitoring of those risks is important to the long-term performance of the investments under our control. In practice, we delegate this to the external managers of our investments.
One of our criteria for appointing an external manager is its ability to manage ESG risk. And while we do not yet set a minimum standard for the ability of our managers to manage ESG risks, we do rate every single manager of the nearly 30 we have hired. This is an integral part of our overall rating of managers, including their investment process, the people and the risks, as well as the robustness of their ESG policies.
We encourage our managers to improve their rating and with some success – for example, at least two of our managers have signed up to the UN-backed Principles of Responsible Investment (PRI) while carrying our mandates. And while we have not published our findings we have had our impacts internally audited over the last two years, and this audit did recognise a greater ESG awareness among our fund managers.
By making allocations to farmland and timberland we are now also bringing sustainability into our asset allocation. We have selected some farmland managers and are currently going through due diligence with them. So ESG has a prominence in our thinking across the board and across all asset classes.
NR: Does the PPF’s lifeboat status for the UK’s pension industry require you to showcase your ownership actions?
MC: The PPF has low appetite for risk, which is why we want to make sure we use as many risk management controls as we can; responsible ownership and ESG are part of this picture. Although we operate in the public eye, and therefore our approach is clearly visible, it is for others to judge whether some of the things we put into our strategy can work for them too. In other words, while we do not have any responsibility for the investment decisions of the pension schemes we cover, we would like them to look at what we do.
NR: Fixed income dominates at the PPF, with cash, UK Gilts, global government bonds and global aggregate bonds including credit making up 70% of the PPF’s strategic allocation. How difficult is it to roll out ESG and responsible ownership across those asset classes?
MC: Responsible ownership in fixed income is less easy to express, but increasingly we have seen fixed income managers taking more interest in ESG issues, particularly where they play into global investment themes. At a portfolio level, several credit managers are as good at applying ESG factors to their investment model as equity managers because the measurement of ESG risk and the assessment of credit risk are quite closely aligned.
NR: What are the limits of responsible ownership?
MC: As a globally diversified, multi-asset class investor, the responsible ownership issues the PPF faces are broad, and not just in equities. One minute we apply our ESG principles to our private equity holdings, the next to fixed income.
In equities, the reach of modern mandates can be an issue. But when you own shares in many global companies, the only practical way to undertake responsible ownership is to use the resources of a researcher or a voting and engagement provider. We simply cannot monitor every movement in the companies by ourselves.
Collaboration with similarly-minded investors is a way forward, particularly for smaller and passive investors who cannot engage themselves or through an agent. In my opinion, arguments about lack of scale need not be the excuse for not achieving a good outcome for your beneficiaries.