The art of writing a successful stewardship policy

Helen Price, assistant investments officer at Brunel Pensions Partnership

Last month, Brunel Pensions Partnership outlined its strategy for influencing the environmental, social and governance behaviours of companies in which it holds shares. Helen Price explains how the LGPS pool went about the task of preparing its stewardship policy.

Producing Brunel’s first stewardship policy, a document which defines how we implement our active ownership to take “care” of all the assets under our remit, was no small task.

While it proved a time-consuming process, it represented an opportunity to start from afresh.

Responsible stewardship does not just apply to listed equities – it covers all asset classes.

We recognise that the approach needs to be tailored to each type of investment (asset class) to take account of the level and legal structure of ownership, regulatory expectations and limitations, and be mindful of differences across geographies.

Although the policy currently focuses on listed equities as Brunel builds up its assets under management, we will develop policy guidelines to set out the active ownership approach across each asset class

Begin by having conversations

As one of the UK’s eight LGPS pools, Brunel is answerable to our 10 LGPS clients, whose LGPS investments we manage.

We engaged actively with clients at an early stage in the process to build a policy which is progressive and supportive of fund boards, where appropriate to be so.

The policy went through multiple iterations – clients were consulted throughout the process to ensure the final policy represented collectively all our views, whilst pushing the agenda forward.

As a starting point, we read numerous voting policies across the industry to understand the different approaches and gain an understanding of the direction of travel.

However, collaboration is instrumental in developing a stewardship policy and voting principles.

We had many discussions with industry peers, gleaning from their expertise and experience.

Our engagement and voting provider, Hermes, was also an extremely useful resource, lending expertise and insight.

In reviewing and discussing the breadth of policies, we identified areas we wanted to progress and take a step further.

Aim for impactful outcomes

It was clear from early on that every stewardship policy focuses on certain areas – usually those backed by expertise and those that matter most to the owner, such as governance or environmental.

This is why it’s important to look at a wide range of policies as possible to see how different areas of concern are addressed.

There’s a practical element to this – we understand that to achieve impact, we need to vote in line with others where practical and helpful.

This doesn’t mean to say we compromise on our own beliefs, but that collectively we send a stronger, clearer message to companies by delivering the same voting action, such as a vote against the chair.

You also need to consider the danger that you could end up voting against the chair of every company, when what you really want to do is shift behaviour in the right direction.

It is important to recognise that principles which apply to the domestic market should be sense-checked for other economies where issues may just be emerging.

You want to vote against the worst in class or with the best in class.

Engagement and voting are intrinsically linked – if you’re voting against a reasonably significant number of companies, then more engagement may be required.

We have outlined what companies can expect from Brunel in the policy in addition to our own expectations of companies.

It can be a challenge aligning engagement themes to voting as there may not be a directly related voteable action, or there may not be a defined market definition of data to effectively implement.

It i not uncommon to see these absent from policies or at the rear.

We strongly wanted to demonstrate how engagement and voting are linked and therefore set out our voting guidelines in a sequence that reflects the level of individual control that a company has in managing topics.

We are highlighting the need for companies to respond to high level global risks, which are often not a focus of attention but where a failure to manage can have significant financial consequences

One area where we could link the two together was diversity.

As supporters of the diversity project and members of the 30% Club, we took a robust stance on gender diversity, which is something we chose to cover in detail in the policy.

Remember that nothing is set in stone

Clarity of language was crucial.

To aid this and ensure transparency, we opted for a structure that included tables to break up blocky areas of text, and eradicated waffle wherever possible.

A single phrase can be perceived in countless ways – one principle was reiterated six or seven times to make sure everyone who read it perceived it in the same way and that it had the desired intended outcome.

The early drafts of the policy were looked at by six different levels of committee and went through numerous rounds of feedback.

Voting policies are dynamic.

At the time of the Brunel Stewardship Policy’s publication, 2019 proxy voting guideline updates had not yet been released.

We recognise that minor tweaking or updating will be necessary to keep it effective, but we attempted to write it with upcoming changes in mind, incorporating areas that are developing momentum and anticipating the requirements we can expect.

For example, we’ve covered gender pay gaps extensively and virtual AGMs, despite not seeing much mention of these in other policies.

We already have a clear idea that these issues will feature strongly in reviewed stewardship policies going live in 2019.

The Financial Reporting Council will be carrying out a consultation on the Stewardship Code, likely early next year.

We needed to be mindful that future updates will be required – it is impossible to futureproof a document of this nature.

Our stewardship policy is a living document.

Our policy document aims to cover everything in sufficient detail, but remain succinct and easily navigable. Importantly, however, we state within it that the content isn’t exhaustive – just because something isn’t included, doesn’t mean we won’t vote for or against it.

Finally, be prepared for the fact that the document you set out to create is a mere embryo of the one you will end up with.

Over time (and it will take far more time than you expect), it will grow from a list of bullet points to a fully-fledged document taking in areas you’d barely considered beforehand.

As you deepen your knowledge along the way, you will inevitably encounter challenges to your assumptions. That will help aid and develop your knowledge.

Top tips for preparing a stewardship policy

• Do work with others – collaboration is extremely insightful, helps challenge standards and collectively develops knowledge and the impact of our voting;
• Do not feel the need to cover everything – just because you don’t mention it doesn’t mean you don’t consider it, focus on key areas;
• Do anticipate change – you will need to add and amend elements however comprehensive your document is;
• Do be prepared for the process to take far longer than you expect.

Helen Price is assistant investment officer at Brunel Pensions Partnership

Get the LGPS Quarterly Briefing