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RPMI Railpen: How Covid affects the way we view our portfolio

Michael Marshall, head of sustainable ownership initiative, and Caroline Escott, senior investment manager, are part of RPMI Railpen’s active ownership team.

The idea of changing roles in the midst of a pandemic sounds uncertain and risky. Yet 6.1% of employed people in the UK moved jobs in the first half of this year, including us. We recently moved from our previous roles and joined RPMI Railpen’s sustainable ownership team.

Active ownership is a critical part of our work to build value for our beneficiaries. We have always believed that strong governance at portfolio companies gives them the greatest opportunity to manage all risks and opportunities appropriately. This includes the ‘E’ and ‘S’ issues, but also how those issues respond to and face a systemic and unprecedented crisis like Covid-19.

Some commentators have said that the pandemic has changed their view on the importance or relevance of ESG. Though Covid-19 does not necessarily bring new ESG issues to light, it has drawn attention to under-explored issues and plugged them into a huge ESG amplifier. No more so than in the ‘S’ of ESG, where the companies best-positioned to deliver on this are those that are purpose-led.

The strongest businesses are guided and inspired by a purpose which benefits society. These companies are more likely to have durable franchises, lasting brand value and a greater propensity to withstand the shocks and stresses of market and economic traumata.

As long-term investors, we are more attracted to businesses that have, during the Covid-19 turbulence, rallied around their corporate purpose and their continued drive towards creating value for investors and other stakeholders, such as the workforce and local communities. Over the long-term, we would expect purpose-led companies to enjoy a lower cost of capital.

This pandemic has had a profound impact on many lives. When you scale up to our 350,000 members, that is a huge impact, particularly for those now drawing their pension. Against this backdrop, we remain focussed on our core mission of paying members’ pensions securely, affordably and sustainably.

Covid 19: A corporate litmus test

As an investor, we have seen Coronavirus put companies’ governance, controls and adaptability to the test, which influences our approach to:
– Cybersecurity
– the risk implications for many sectors with a wholesale shift to home-working
– Capital allocation and capital maintenance
– the need for companies to consider the approaches to capital raising, dividends, buybacks and remuneration that make the most sense for resilience and future success
– How much value a company really places on shareholder engagement
– how willing they have been to ensure shareholders have opportunities to appropriately scrutinise companies in the new virtual meeting and webcast AGM world.

Using the full active ownership toolkit

Our engagement – collective and individual – takes place all year round. As soon as governments and companies started adjusting their behaviour in light of Coronavirus and market movements, it provided opportunities to interact with portfolio companies to understand the impact of the pandemic and to outline our expectations of corporate behaviour.

Our sustainable ownership team worked with our trustee, pension committees, internal and external portfolio managers, other investors and pressure groups to make this happen. As well as taking part in collective engagement initiatives such as the Workforce Disclosure Initiative, the PRI’s Covid-19 Participation Groups and deepening our work with other investors on cybersecurity, we also backed up our collective and direct engagement activity with voting action during AGM season.

Whilst we were prepared to support companies acting responsibly, we also found ourselves voting against companies which we had not moved sufficiently towards a robust and accessible AGM process and against those whose remuneration committees we thought had failed to show adequate restraint in respect of executive pay awards, particularly where employees had been furloughed or other government assistance had been accessed.

Looking ahead to 2021

How companies have operated during Covid-19 will continue to shape our conversations and give food for thought in our stewardship programme design and updated voting policies. We know the pensions industry has adapted well to the challenges of looking after its workforce and ensuring continued service for beneficiaries. This comes back to being aware of a purpose which, for Railpen, is crystal clear. Like many investors, we were ‘ESG believers’ before the pandemic, but Coronavirus has ramped up the risk rating in several key areas.

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