Learn from the Past, Look to the Future

Doug McMurdo, Chair of the UK’s Local Authority Pension Fund Forum, says positive social and environmental policies stem from good governance.

This January marked the three-year anniversary of the Brumadinho Dam disaster in which 272 people lost their lives and millions of tonnes of toxic waste flooded local villages, becoming Brazil’s worst ever industrial disaster.

This overtook the Marinara dam disaster as Brazil’s most catastrophic environmental event, which killed 19 people and destroyed the village of Bento Rodrigues in 2015.

Mining company Vale operated the Marinara dam, jointly owned by BHP, and had sole ownership and responsibility for the Brumadinho dam when the tragedies took place.*

The battle for reparations has been hard fought and, according to Councillor Doug McMurdo, Chair of the Local Authority Pension Fund Forum (LAPFF), which oversees more than £300 billion of local government pension fund assets, are insufficient.

McMurdo says: “How can one repair and compensate for the loss of 272 people? It’s just not possible. [LAPFF] continues to hear from affected parties in Brazil that the next dam collapse is only a matter of time. Haven’t people suffered enough? The authorities and companies involved must step up as soon as possible and prevent these wholly unacceptable events.”

Last February, Vale agreed to pay US$7 billion in compensation. However relatives of the victims in the disaster say no one from either company has been held accountable and they continue to work with LAPFF and other investors to seek improvements in mining safety.

Collective voice

LAPFF’s involvement with the tailings dam disasters stems from its role as representative of seven million public sector pension scheme members across the UK, giving them a collective voice as active shareholders.

McMurdo’s position is clear: institutional investors have a clear responsibility to their members and to the wider world to ensure that the companies in which they invest are held to the highest environmental, social and governance standards.

The Forum, which celebrated its 30-year anniversary last year, uses the local government pensions schemes’ (LGPS) combined heft to influence some of the largest companies in the world, through direct engagement and by encouraging members to vote at annual general meetings on issues such as directors’ pay, climate change, labour rights and corporate fraud.

While the forum brings together 84 of the 98 disparate voices of the LGPS, it does not control the stewardship activities of each underlying local authority fund and each of its members have their own ESG strategy. LAPFF also represents the majority of the regional pooled LGPS schemes – Border to Coast Pension Partnership, Brunel Pension Partnership, LGPS Central, London CIV, Northern LGPS and the Wales Pensions Partnership.

Each fund also engages with their own suite of investment managers, and since much of the local authority pension money is run on a passive basis, McMurdo says this interaction with asset managers is crucial if investors are to influence corporate behaviour effectively.

“If you look across the membership of LAPFF funds, they ultimately have responsibility for their own strategies. A lot of the LGPS funds are tilted towards passive investment which means engaging with their managers on relevant ESG issues.”

The LGPS members that join LAPFF become part of a formidable collective that has been influential in driving positive corporate change.

In 2021 LAPFF engaged with 171 companies, many of those major international organisations that make up the indexes to which the funds are exposed in their passive equity strategies. HSBC, ArcelorMittal, and AngloAmerican are among the multinationals where LAPFF says it has affected “substantial improvements”.

McMurdo says he is no stranger to speaking directly to company executives and notes recent conversations with Rio Tinto board members after the mining company was found to have blown up two sites of cultural significance in the Juukan Gorge, Western Australia.

Rio Tinto’s senior executives had ignored reports that warned of the potential devastation should mining go ahead, leading to resignations of its top brass including CEO Jean Sebastian Jacques, Chair Simon Thompson and Non-executive Director Michael L’Estrange.

“I told the Rio board that they should have seen this coming. None of these mining disasters are accidents; they are the result of poor governance,” he says.

Following investor engagement with Rio Tinto, the mining company has since completely overhauled its cultural heritage management by “revising internal governance, including policies and procedures, and practices”.

Blinkered executives

LAPFF’s success in driving reforms at Rio was in part due to its collaboration with other investors. McMurdo says it is critical that large institutional investors unite if they are to realise change.

Alongside recent partnerships with the Institutional Investor Group on Climate Change and Climate Action 100+, McMurdo highlights the forum’s recent work with Say On Climate, the initiative from billionaire investor Chris Hohn which demands companies submit a climate transition plan at their AGM for shareholder approval.

McMurdo says Say on Climate demonstrates investors’ willingness to dismiss companies’ green pledges if they do not stand up to scrutiny. He points to shareholder dissent at BHP’s AGM last year where more than 15% of investors voted against the company’s climate transition action plan.

Opponents, including LAPFF, said BHP’s plan did not align with the Paris goals and failed to set out reduction targets for Scope 3 emissions generated by its customers.

While the revolt led BHP Chair Ken MacKenzie to agree to “ongoing dialogue” with shareholders to discuss their “realistic” concerns, the mining company’s climate plan remains largely unaltered.

Similarly, the LAPFF recommended members vote against Royal Dutch Shell’s climate resolution last year, because it did not “sufficiently address the challenges Shell faces with competition from renewable energy potentially putting fossil fuel businesses out of business on cost grounds alone”.

McMurdo anticipates more such rebellions this year, which he says reflects the pervasive greenwashing evident in net zero plans.

He says: “It’s harder to find [climate] transition plans that are aligned with Paris than it is to find ones that aren’t. When you have a mature executive team, you find entrenched mindsets, cultures, attitudes that are not aligned with managing climate change. This is made worse by many of the existing compensation structures.”

LAPFF has been vociferous on directors’ compensation and incentive plans, particularly when these disproportionately generous to those of their workforce or at odds with the green transition.

For example, the forum has engaged with Persimmon Chair Roger Devlin after the housebuilder awarded its outgoing CEO a £100 million pay-out.

LAPFF focused on changes to executive pay and discussed Persimmon’s commitment to ensure that all new homes are net-zero by 2030.

McMurdo says: “Executives get very blinkered, and they become less focused on people and the planet. That is why governance is so important. If you have good governance, you will see good flows into the environment and society.”

Disputing divestment

McMurdo says achieving a just transition is critical if LAPFF is to achieve its twin aims of protecting the planet and its people as the AGM season gets underway this spring.

He argues that companies must be able to move to net zero without creating inequality and deprivation for those societies currently dependent on traditional sectors such as oil and gas.

“Think back to the late 1980s and early 1990s when the UK government pulled out of coalmining. That absolutely devastated local communities. We cannot just divest from fossil fuels; we need a fair and just transition to the net zero economy.”

And McMurdo’s caution about divestment is not limited to the energy sectors. He argues that since so many companies’ activities are interlinked through supply chains, if investors want to pull money from one sector, they will likely be forced to withdraw from numerous others simultaneously.

He says: “Taking a simple example, if you’re withdrawing from the tobacco industry, you might as well get out of Tesco, Sainsbury’s and all the others, because they are all part of the supply chain. For me to divest from any sector, I have to be clear that I am able to fulfil completely on the principle.”

While divestment is not on the LAPFF’s agenda, continued engagement certainly is so long as it meets the acid test: good financial outcomes for members.

McMurdo concludes: “All our engagements have financial materiality attached; it is important to remember that. Good governance should always filter down to positive returns.”

*This article has been corrected to remove an erroneous reference to BHP having a stake in the Brumadinho dam. BHP does not and never did hold any stake in the Brumadinho dam project.

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