The PLSA aims to help its members engage with investee companies – either directly or working through their advisers and managers – to protect and enhance the value of savers’ capital and act as good stewards of their assets.
As with previous iterations, the guide reviews new regulations on shareholder engagements and includes dedicated sections designed to help investors challenge how investee companies are managed. It tackles issues such as board leadership and company purpose, division of responsibilities, audit, risk, climate change, the workforce, and capital structure, among others.
The new edition takes stock of recent political and economic circumstances, which influence the evolving topics investors engage with when it comes to stewardship. Three themes have emerged as having particular relevance for 2023: the cost-of-living crisis, climate change, and the impact of company operations on its workforce and wider society.
Cost of living crisis and executive pay
Executive pay has consistently concerned shareholders in recent years. According to Minerva Analytics, remuneration and board-related resolutions were the largest sources of shareholder dissent in 2022, accounting for 44.33% and 29.87% of high dissent resolutions, respectively.
The cost-of-living crisis, high inflation and energy price hikes draw particular attention to this issue in 2023.
Schemes which participated in workforce reporting analysis in 2021 – undertaken with Railpen and CIPD – revealed participants want to feel reassured that greater attention is being given to employees’ pay at a time when they are struggling most.
The PLSA has always recognised the importance of appropriate remuneration policies as a litmus test for wider corporate governance practices.
The Voting Guidelines recommend remuneration structures and incentives for executive directors should cascade down to all employees in order to allow employees to share in the success of the business. They also encourage shareholders to vote against the remuneration policy where it doesn’t match up to the standards in the guidelines.
Climate change and the environment
Though the cost-of-living crisis has been particularly prominent in the headlines in recent months, there is no evidence that investors are reducing their focus on climate change issues. Indeed, the PLSA has noted an increased focus among its members to hold their investment chains accountable to their Net Zero commitments, with a growing expectation of targets and transitions plans.
The pension sector is now required to produce an annual Taskforce for Climate-Related Financial Disclosures (TCFD) report, including all schemes with over a £1 billion in assets. The PLSA therefore expects that companies reference the TCFD in their reports, in order to enable investors to fully assess the extent of their climate risk. We also expect to see evidence of credible transition plans, given the likelihood that this will soon be a mandatory requirement.
While the issue of climate change is currently receiving significant focus, other sustainability issues – such as waste, deforestation, water usage and biodiversity – are also high on many investors’ agendas. Investors should be careful not to ignore non-climate sustainability issues and consider carefully which sustainability issues are most material to holdings in their portfolio, prioritising allocation of stewardship resources appropriately.
Here the PLSA specifically recommends investors consider voting against companies’ annual report and accounts where “operations are highly carbon intensive and there has been no disclosure of the climate-related assumptions which underlie their financial calculations, or where those assumptions are not consistent with the Paris Agreement.”
Workforce issue and impact of operations on society
The Covid-19 pandemic exposed a growing sentiment of the need to improve working conditions for staff. Mental health, alongside other wellbeing practices, should be at the heart of companies’ workforce concerns. On wider workforce practices, it remains paramount that companies take steps to ensure that modern slavery is not taking place within their business or supply chains.
The PLSA also supports continued progress on workforce disclosures. Companies are expected now to continue progress towards the 2024 targets for ethnic diversity on FTSE 250 Boards, as set out in the Parker Review.
Efforts should also be taken forward to imbed better practices to increase wider diversity and inclusion – of all protected characteristics – in organisations.
Joe Dabrowski, Deputy Director - Policy PLSA, said: “Large shareholders have a duty to act as good stewards of the capital they manage on behalf of pension savers and other end investors. Annual general meetings are an important juncture at which they can scrutinise and influence directors to ensure investee companies are run in the best interests of pension savers and other long-term shareholders.
“The Stewardship and Voting Guidelines include many and specific examples of the types of corporate behaviour investors should be challenging as they dispense their stewardship responsibilities and are intended to encourage the highest standards from company directors. Numerous studies have shown that companies that uphold the highest corporate standards tend to financially outperform, adding value to the millions of pension savers they count among their shareholders.”
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