Railpen’s Caroline Escott: “We see opposition to ESG as a spur to work even harder at getting that message out.”


24 May 2023

Railpen’s senior investment manager tells Andrew Holt about the importance of voting, focusing on the big picture, dealing with cynics and standing on the shoulders of giants.

Railpen’s senior investment manager tells Andrew Holt about the importance of voting, focusing on the big picture, dealing with cynics and standing on the shoulders of giants.

Why has Railpen helped create an initiative to get workers heard at board level?

Well, a few things came together. Firstly, there is a growing body of evidence that an engaged, fulfilled and motivated workforce that feels listened to is important for long-term financial success. And that matters to us as investors.

The second piece was that even though we recognise there are many useful workforce engagement mechanisms out there, we at Railpen have, for some time, thought workforce directors are under-utilised amongst companies.

We see for ourselves, with our own trustee board, the benefit of cognitive diversity that comes from having that broader perspective.

We also recognise there are examples of the positive impact workforce directors have had on the running of a company and on strategic decision making.

We have worked with companies, investors, academics and workforce representatives to pull together some guidance that we hope will offer more clarity to companies who are thinking about this.

What is this initiative’s ultimate goal?

There are two objectives. The first is for those companies that are already thinking about this, to give them some clarity, some food for thought. It pulls it all together for them, with the evidence demonstrating that under what circumstances workforce directors might be helpful.

But it is also to encourage companies who aren’t thinking about workforce directors as an employee engagement mechanism to get over some of the misperceptions and have a proper look.

What are those misperceptions?

There are concerns that organisations will not be able to find someone with the necessary skill set. But the evidence shows that with the right training, the right support and an inclusive board level environment, workforce directors add a valuable perspective.

This focuses on the S and the G. How important is ESG overall to Railpen?

Railpen has been active on what we call sustainable ownership for a long time. We were one of the first pension schemes to publish a global voting policy and to have in-depth corporate governance policies. And we have been building on that over the years.

Given our long-term horizons, sustainable ownership is absolutely fundamental to protecting and enhancing value for beneficiaries. So we do it at the core.

When did you first approach it that way?

We published our first global voting policy in 1992. I remember 1992. There were luminaries like Frank Curtis and Deborah Gilshan, who were our industry titans.

I use this phrase a lot, but [Railpen’s] sustainable ownership team feels that we are standing on the shoulders of giants.

Why does your sustainable ownership team work on three areas: integration, stewardship and the climate transition?

We work closely together across our teams. ESG is integrated within the ownership and climate work stream. It is all about stewardship and the integration of climate change and financial analysis.

That being said, ESG integration is about incorporating financially material sustainability considerations into our investment analysis and decision making.

Active ownership is thinking about how we use that information to influence the companies we invest in to improve their corporate behaviour.

On financial materiality, the climate work stream is looking at doing it through a clear-eyed understanding of the key emitters in our portfolio. Then thinking thoughtfully about how, and where, to engage with these companies to achieve real world impact on climate change.

What percentage of your assets are held in ESG investments?

We look to incorporate or address financially material ESG issues across all our portfolio. We look at ESG holistically and try to incorporate it across all asset classes.

Our portfolio has £34bn of assets and we try to look at ESG, in different ways, across all of it. There are holdings we engage on and do a bottom up analysis of.

We also think about big picture ESG themes: climate change, biodiversity or workforce issues that affect our whole portfolio, or a substantial chunk of it.

Then we have long-term infrastructure investments, focused on things like the mental health facility we are supporting in Sunderland.

Which is the most important element in your ESG approach?

Leadership. It is fundamental to creating long-term value for beneficiaries. We consider all ESG issues and we have a clear focus on financial materiality.

We look at ESG issues that are thematic in the portfolio and at the bottom up level, which we believe are most likely to impact the long-term financial performance of a particular asset or a company.

You also use your ESG approach to steer your votes at AGMs. How successful has that been?

We consider company performance on, again, financial materiality as well as environmental, social and governance considerations, when we cast our vote.

This is often, and importantly, aligned to engagement. There is a steep spectrum of stewardship tools and engagement sets. At one end of it is voting and ownership rights, with divestment at the other.

For us, most of the impact is when you align your voting with your engagement and use that as part of a stewardship strategy, with an understanding of the objective that you are trying to achieve. We use that approach across our major holdings. I would say that it has had some positive impact in the few years we have been engaged with these companies. Of course, with some of them we have longer-term relationships.

Can you shift the ESG dial on companies through voting alone?

It is possible to have an impact. We see that through some of the activities and changes in corporate behaviour that have happened as a result.

Voting is an important stewardship tool. It is a public expression of shareholder dissatisfaction with the company, or support for its behaviour on certain key issues.

I would say that it is most impactful when aligned to a broader stewardship strategy, which can include engagement.

I will also say that it’s more impactful when investors think not just about voting on a generic resolution, but where they are particularly unhappy with a company’s behaviour and vote against the individual director that they deemed responsible. That is something we try to do at Railpen.

Voting season is an important opportunity for influence. You get to exercise your vote and companies are incentivised to meet with you before and after the vote.

That’s a good opportunity to reinforce relationships and with it, progress on those issues.

As asset owners,
we sit at a privileged part of the investment chain.

Are there any times when you consider divestment as an option?

We have a number of exclusion processes. We have a climate exclusion process where we exclude companies from our portfolio if they have a certain proportion of revenue deriving from things like oil sands.

We also have a cluster munitions exclusion process. And we have what we call a governance and conduct zero weight exclusions process, which we have been building upon in the past few years. This is about those companies where there is either a conduct issue, or where there are many governance red flags.

And there is the case when we engage with a company and they do not feel like they recognise there is an issue or they are not truly committed to improving their governance.

What other ESG aspects do you look at?

There is the big picture, the top down, systemic level of issues that face our portfolio. And for that, we have some major themes. There is, of course, the climate transition.

Then there’s the workforce, looking at a number of different workplace issues, like worker engagement. We have also been doing quite a lot of work on workforce disclosure. Workforce human capital is an area where the quality of disclosure from companies is highly variable. It is material. Something needs to be done to change it.

Also technology: thinking about issues like cyber security or content moderation governance that impact some of the large media and tech firms.

And then there are sustainable financial markets. And within that, because sustainable financial markets could cover quite a big piece, quite a huge suite of things. Our work is focused on things like unequal voting rights through the Investor Coalition for Equal Votes.

And from next year, we are also going to be doing some more work on audit – and the quality of audit.

How would you rate how the investment industry has dealt with ESG?

We are all on a journey. Some of us maybe started a bit earlier on the journey than others. But even in the 10 to 15 years I have been in the industry, the level of support for ESG has grown exponentially amongst asset managers, asset owners and policy-makers. So that is positive.

Are asset owners and asset managers on the same page in terms of the importance of ESG?

Asset owners are becoming increasingly demanding of clients on ESG. That is positive.

Asset managers have, for instance, collaborative, open engagement processes. We at Railpen work closely on a number of ESG-related issues with them.

Are governments and supranationals doing enough to address ESG issues?

It has a positive groundswell of support and action. We have seen that at the UK government level. We have also seen it at the supranational level. A lot of the debates being had are the right ones. We do need more co-ordination internationally in order to avoid regulatory arbitrage, because investors are global.

How do you view the backlash ESG is facing from some quarters?

There have always been individuals and groups that are naturally sceptical about responsible investment and sustainable ownership.

We survey our members specifically on sustainable ownership.

While there are lots of supportive comments on particular issues, there are also comments around: ‘I don’t want you to do good, I just want you to make as much money as possible’.

Our consideration of sustainable ownership is as something that’s financial material, something that has an impact on the bottom line.

The way we deal with it is to emphasise, in our communications to members and in our other external reporting, the materiality of environmental, social and governance issues to particular investments. We provide case studies to support this. We even pull together a concise summary of some of the available evidence on the financial materiality of ESG issues.

So we see opposition to ESG as a spur to work even harder at getting that message out.

What are your ESG challenges going forward?

It’s boring, but it’s important, and that is the need for clear, consistent, comparable data. Making sure we have the data points we need.

The other point is: it’s been great to see asset owners acting as demanding clients in this and building their stewardship teams.

But we need to continue the scrutiny and the pressure all the way down the investment chain.

As asset owners, we sit at a privileged part of the investment chain. We have the commercial influence to be able to pull up, and through good stewardship and responsible investment practices, all parts, all the way through to the ultimate benefit of members and savers.


More Articles


Subscribe to Our Newsletter and Magazine

Sign up to the portfolio institutional newsletter to receive a weekly update with our latest features, interviews, ESG content, opinion, roundtables and event invites. Institutional investors also qualify for a free-of-charge magazine subscription.