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Engaging with Companies
"Pension funds have a responsibility to act in the interests of members and are in a critically important position to influence the records of the firms they invest in, on issues such as fair employment, good governance and environmental sustainability: all of which can have an effect on returns."
~ TUC in their 2009 report, Engaged Investment
With funds worth billions at their disposal, pension fund managers and trustees have an enormous amount of discretionary power to influence corporate behaviour. There is a strong imperative for pension funds to become active, responsible investors:
- growing evidence that companies incorporating ESG issues into their business strategy are better managed and more profitable over the longer term;
- several ‘early adopter' pension funds demonstrating how Responsible Investment can be implemented;
- local authority pension schemes demonstrating good practice on greater transparency and accountability; and
- legal guidance that suggests ignoring ESG issues in investment could be "a breach of fiduciary duty." (2005)
The term 'engagement' encompasses a series of actions pension funds can take as responsible investors to reduce environmental, social and governance risks. This can include raising concerns or making proposals about company practices directly to the investee company's directors via correspondence, face-to-face meetings, attendance and voting at AGMs.
Since pension schemes often mandate asset managers or other service providers to pursue an engagement policy for them, it is vital that pension fund trustees make clear their requirements regarding engagement, and put in place monitoring and reporting mechanisms to ensure such engagement is effective. This can be achieved by incorporating an RI policy into the scheme's Statement of Investment Principles (SIP), and into contracts with asset managers or specialist service providers.