Before we get to the ‘G’, let’s break down what ‘ESG’ stands for: economic, social and governance (ESG). It is the role of the Sustainable Ownership team at Railpen (the investment manager of the Scheme) to understand which ESG issues are most likely to have an impact on the financial performance of the companies your pension is invested in, and to improve companies’ behaviour in this respect.

Although some people think of ‘E’ or ‘S’ issues such as climate change or workforce treatment when they hear the term ‘ESG’, the ‘G’ is perhaps one of the most important issues for the companies we invest in to get right. This is because the good governance of a company is foundational to its long-term success and prosperity.  And this is what this blog will focus on.

Interestingly, in January 2024, many of you said that governance – how well the companies your pension is invested in are being run – continues to matter the most to you. You also said you trust our judgement and want us to use our influence to encourage positive change in those companies. Railpen will continue to provide regular updates to members on their work in this area.

Corporate governance and your pension

In the world of pensions, corporate governance is all about making sure the companies we invest our members’ retirement income in are:

• led by a diverse group of people with the right expertise and experience
• supported by robust systems and processes, and are
• influenced by the perspectives of their shareholders (like Railpen)
  

Good corporate governance can be subjective depending on the purpose of a business. In its most straightforward meaning, it refers to the people at the top doing a good job across all aspects of managing the company while being supported by the right kinds of systems and processes across the organisation.

Whether a company is well-run is one of the most important factors in whether it performs well. Railpen wants the companies it chooses to invest in to do (very) well because this has a direct impact on the return on the investment they’ve made, and ultimately on members’ retirement outcomes.

This is why Railpen has a strong focus on governance and strives to ensure the businesses it chooses to invest in have a healthy culture and strong processes at every level. It tries to influence companies to do better through using some of the wide variety of tools we have at our disposal. These include:

• Using its voting power at company meetings (Annual General Meeting – AGM) to publicly escalate concerns when insufficient action is being taken in relation to governance-related issues.
• Regular, open conversations with companies and supporting them to address the issues they are facing.
• Advocating for change if they believe certain tweaks need to be made to laws and regulations to support companies and individuals to make sustainable choices.
• Sanctioning companies through ‘divestment’ or choosing to remove them their investment portfolio. Railpen would take this step if we are not noticing the positive change in their actions and behaviour we were hoping to see.
  

Driving meaningful change for better financial outcomes for members

We’ve highlighted above that one of the ways the Scheme’s investment manager can influence companies to improve corporate behaviour is by voting at their AGMs. Being able to vote for or against a company at its AGM ensures they can publicly hold company management to account. So, it’s essential that all shareholders are given a fair and proportionate voice.

Recently, Railpen had found that this wasn’t the case for some of the companies it invests in. It identified that some investees (shareholders) have more and stronger voting rights than others (unequal voting rights) which could potentially harm member outcomes.

To minimise the risk for members, in 2022 Railpen co-founded, and now chairs, the Investor Coalition for Equal Votes (ICEV) with the Council of Institutional Investors (CII) to tackle the issue in a different way. ICEV’s efforts focus on engaging with companies early in their existence - when they are still open to conversations and have the ability to make changes to the way in which they structure voting rights. The Coalition also engages with advisers, policymakers, commentators and the market to initiate changes that’d ultimately lead to improved financial outcomes for members.

Since its launch ICEV has achieved considerable progress including growing its pension assets to $3tn, influencing advisers to change their advice to their company clients and, ultimately, encouraging companies to give all their shareholders an equal say in how they are run. In 2024, we will continue to engage with early-stage companies, using the findings of our recent research paper Undermining the Shareholder Voice to help make our case for equal voting rights.

Broaden your knowledge of corporate governance and Railpen’s work in this area

Find out more about Railpen’s engagement and voting priorities, including how it takes voting decisions at companies’ AGMs that are in the best interest of members, in the 2024 Global Voting Policy. Our priorities reflect what we consider to be good corporate governance and how well companies are managed.

Discover more about the work of the ICEV with the:

• ICEV Report 2023
• ICEV Executive Summary, and the
• ICEV Investor Statement