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This AGM season faces a shifting climate

15 May 2018 by Jimmy Nicholls

This AGM season faces a shifting climate - Read more

Investors are demanding firms do more on environmental and social issues, including board diversity and climate change

In the midst of AGM season, boards are facing pressure from investors to take greater account of diversity, executive pay and environmental impact – just some of a range of environmental, social and governance (ESG) issues.

Legal & General Investment Management (LGIM), an asset manager responsible for almost £1 trillion, said in its annual corporate governance report that in 2017 it had focused on ‘board composition, remuneration, climate change, succession-planning and transparency’ during company meetings.

Companies can expect further action from the asset manager on all of these issues, with directors of firms that fail to make progress potentially facing rejection during future elections.

Investor pressure

In a similar move, a group of investors managing $1 trillion, coordinated by the pressure group ShareAction, has written to chief executives at 15 prominent companies, including Morrisons, Netflix and The Walt Disney Company, encouraging them to take further action against climate change.

The investors said they want ‘to invest in environmentally and financially sustainable companies that are prepared for and contributing to the low-carbon economy’, and are calling for specific targets to be adopted by prominent firms they invest in.

Although the trend is not entirely new, the latest interventions will spur debate on how directors can deal with concerns beyond simple return on investment.

“Investors and companies should guard against the risk of focusing on issues that are not directly relevant to long-term success and profitability”

‘A two-way dialogue is important for companies and investors to understand each other’s perspectives,’ said Peter Swabey, policy and research director at ICSA.

‘However, both investors and companies should guard against the risk of focusing on issues that are not directly relevant to the long-term success and profitability of the company. In some circumstances issues such as board diversity, executive pay and environmental impact may be relevant to the success of the company, but not all investors take the same view on these issues.’

Lacklustre laggards

The threat to directors is real enough. Detailing its plans for the future, LGIM said it would vote against boards whose diversity initiatives are ‘lacklustre’, oppose unjustified pay increases for executives, and publish rankings of ‘leaders and laggards’ with respect to climate change.

Specifically, LGIM said it would in future vote against or divest from firms whose progress on climate change is insufficient, oppose pay increases for executive directors that were out of line with their workforce, and vote against chairs of FTSE 350 firms if less than a quarter of the board is female.

‘The vast majority of companies are making significant progress – we simply believe there is more to be done,’ said Sacha Sadan, director of corporate governance at the asset manager. ‘The same is true of asset managers: we, too, need to intensify our efforts to help deliver long-term value for clients by actively engaging with companies.’

Pay gap impact

A lack of female leadership at companies has been highlighted as large UK companies and public bodies were forced to publish their gender pay gaps by April.

Eight in ten of the firms reported that they pay men more than women in median terms, with many of them attributing the gap to a lack of women in senior roles. Analysis by The Guardian of the data showed that companies with more women at the top had smaller median pay gaps.

Patrick Woodman, head of research and advocacy at the Chartered Management Institute, said the pay reporting regulations ‘have forced employers to be transparent about their gender pay gap’ adding that there was ‘still a yawning gap between rhetoric and reality.’

‘LGIM’s decision to vote against boards that are less than 25% female is a welcome sign that investors are starting to get the message that diversity delivers business results,’ he said.

‘The fact is that companies with diverse and gender balanced leadership teams generate increased returns. According to McKinsey, companies with the most diverse management teams are 21% more likely to outperform their least-diverse competitors – while Credit Suisse has shown an 18% return on equity premium for diverse leadership.’

Woodman added that data from the Chartered Management Institute showed ‘the familiar story of the “glass pyramid”’. The research showed that ‘women outnumber men in the lower-paid quartiles (66%), with far fewer at the top in higher-paid senior management and leadership roles.’

Climate targets

International agreements rather than regulatory requirements appear to have spurred investors to look at climate change. Investors affiliated with ShareAction want the companies they invest in to set targets reducing greenhouse gas emissions.

These need to be ‘ambitious’, ‘science-based’ and in line with the Paris Agreement on climate change. In April, 100 companies had their targets in this area approved by the Science Based Targets initiative.

Sophia McNab, project manager at ShareAction said: ‘I still hear from some companies that they have received no questions from investors on environmental issues. We welcome the leadership of investors in our networks but there is more work to be done by institutional investors.’

“Shareholder resolutions are one way to get a quantitative feel for which ESG issues are of concern to investor”

Speaking for one of the firm’s that signed the letter on climate targets, Isabelle Cabie, global head of responsible development at Candriam Investors Group, said: ‘Climate risk is now seen as a mainstream risk to financial stability by investors and regulators around the world. It is crucial that this translates into pressure on the most high-carbon sectors who are critical in delivering the low-carbon transition.’

Echoing her comments, Vincent Kaufmann, chief executive at Ethos Foundation, which also signed the letter, said: ‘Pension funds, as the guardians of their members’ savings, have an important role to play in the low-carbon transition. One way they can do this is to engage businesses, who are the world’s largest users of energy, to drive a faster transition to cleaner alternatives.’

Growing stewardship

Both ShareAction’s and LGIM’s efforts are evidence of interest in stronger ESG stewardship among investors.

George Dallas, policy director at the International Corporate Governance Network, said: ‘Stewardship is building as a profession within institutional investment firms and investors are increasingly monitoring, voting and engaging companies on a range of themes, which includes ESG factors.’

Dallas added that statistics for stewardship and engagement can be hard to find, ‘particularly with regard to investor meetings with companies, which are typically private.’

Even so, data from Proxy Monitor shows that social policy accounted for 56% of shareholder proposal for the 2017 proxy season for the largest US companies, with environmental concerns the most common proposal type. Corporate governance accounted for 36% of proposals, and executive pay 8%.

‘Shareholder resolutions are one way to get a quantitative feel for which ESG issues are of concern to investors,’ Dallas said.

‘For example, a shareholder resolution at the upcoming Royal Dutch Shell AGM will see shareholders vote whether the company should set firm carbon emissions targets in line with the Paris Agreement to keep global warming to well below two degrees.’

In its press release, ShareAction called on investors to support the shareholder resolution at Royal Dutch Shell. It called the vote ‘another test of investors’ stance on climate change issues.’

In a similar development, investors, including the New York State’s pension fund, are pressing the energy firm ExxonMobil to report on the possible impact of policies like the Paris Agreement. A similar motion was defeated last year. Dallas noted that ‘for various reasons, shareholder resolutions are more of a feature in the US than the UK.’

Clearly investors feel emboldened to pursue these issues. But ICSA’s Swabey warned that directors should not become too focused on pressure groups. ‘We think investor engagement with companies is an important element of corporate governance and we would always encourage it,’ he said.

‘But directors’ primary duty is to act in the best interests of the company for the benefit of shareholders as a whole and, while they must also take into account the interests of their stakeholders, they should not be distracted from these responsibilities by focusing on minority interests or the demands of pressure groups.’

Jimmy Nicholls is deputy editor of Governance and Compliance

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