June 13, 2021

Volume XI, Number 164

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June 11, 2021

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We’re Invested in What?

If you are a trustee, have you ever had one of those letters or emails questioning your investment strategy? I don’t mean questions about de-risking triggers, the security of counterparties or even strategic asset allocation queries, which are the stuff of trustee meetings. The type of enquiry I am referring to is the persistent member or activist (who are increasing in numbers in our experience) who is focused on the propriety of a scheme’s investment in either specific stocks, industries (fossil fuels are extremely popular for this sort of communication) or even countries (a Supreme Court judgment last year highlighted the sensitivity of the Local Government Pension Scheme (LGPS) to this type of exposure).

Such communications generally end with something between strong encouragement and a request to divest as soon as possible from the offending investment(s). Accepting that trustees generally do not have access to PR agencies or corporate affairs departments, what should trustees do when faced with such communications?

First, even if you do not agree with the correspondent, take the approach seriously and check the facts. Many trustees may find themselves unwittingly exposed to a reputational risk by investing in a company or a sector which could bring them embarrassment. Some well-informed activists have even been known to provide a list of individual stocks to LGPS funds (where Freedom of Information Act requests may of course be made), but with the advent of greater online disclosures being encouraged in the private sector in a number of areas, it would not be too surprising to find that trustees don’t know what their underlying investments are and have to be told by an assiduous third party. Being at an information disadvantage is not a good position from which to defend your investment strategy.

When communicating with your investment managers, take the opportunity to check that their policy and approach to the relevant area is aligned with your statement of investment principles and more importantly to your own investment beliefs as a trustee board. Is it time to reconsider your approach to environmental, social and governance issues (and whether it is actually yours or the one that was recommended by your investment consultant)?

Check the contractual rights that you have to receive information about your investment holdings, so that you can head off any future reputational risk. Especially if you are invested in private markets, you may not receive such information until well after investments have been made and you are likely to have no rights, unless you have negotiated them expressly, to be excused from investments which might be a source of embarrassment. The same can be said of a passive investment approach.

Finally, although aggrieved members and shareholder activists may not be an everyday occurrence, consider whether your risk register needs updating to include reputational risks (alongside a breach of your ESG policy). Do you need to prepare a communications plan to sit alongside your ESG policy breach response plan?

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 132
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About this Author

Clifford Sims, Squire Patton Boggs, Pension Fund Investment Lawyer, UK
Partner

Clifford is a partner in our London office and heads our Pension Fund Investment Group. He is recognised by Chambers UK as a leading individual for pensions and “an expert in investment and financial services in relation to occupational pensions” who is "extremely well organised, very commercial" and “is someone who is able to combine good technical knowledge with communications skills”.

The Legal 500 UK commented he is “more commercial than the average pensions lawyer” and “deeply knowledgeable”. He advises trustees, local authorities, product...

44 20 7655 1193
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