Making the decision to divest

First, there is a misconception that engagement applies only to equities. In fact, it is a tool that can be applied to any asset class.

Many fall into the trap of dismissing engagement as impossible or irrelevant if investments are not in equities.

The most common misconception around engagement, however, is that it can only ever be a weak tool.

Engagement is frequently criticised in this regard, and the perception is often of ‘cosy chats’ between investors and companies.

Sometimes that criticism may be valid, but engagement has the potential to be a far more powerful mechanism.

So-called ‘forceful stewardship’ is one mechanism for giving engagement additional impact, for example.

Engagement can also be made more effective when accompanied by the threat of divestment.

The threat of divestment signals disapproval, while it also provides investors leverage if they make it known they are willing to sell their holdings in the event that the company does not respond to engagement.

What members want

A key question is around what members want. And how does this fit alongside trustees’ primary duty to act in members’ financial interests?

It is often assumed that getting member views is a good thing. However, this may not always be the case.

There is public pressure to act on climate change, while there is a legal requirement to fulfil fiduciary duties.

So where do member views fit in?

Important questions arise, such as: How representative is members’ feedback? Will it be acted upon?

If trustees do seek member views, trustees may feel obliged to act on those views, whereas the reality is that trustees must look squarely at the financial arguments (at least as current law stands).

Some members may call for wholesale divestment from fossil fuels, but trustees would first need to be satisfied that this is the shared wish of the membership, not just of a vocal minority, as well as ensuring divestment does not risk significant financial detriment.

However, while these challenges may deter trustees from actively seeking member views, that does not preclude trustees from communicating their climate policies to members and demonstrating the trustees’ active engagement in the debate.

Members who want to make their voice heard can play an important role in holding trustees to account by seeking this information if trustees do not provide it proactively.

Transparency, accountability and legal pressure

This ties in with the broader push for transparency in this area. Since October, defined contribution schemes have had to publish their Statement of Investment Principles, while similar reporting requirements will be imposed on defined benefit schemes from October 2020. These steps will mean that members have greater sight of what schemes are doing.