18 June 2019 by Anthony Hilton
LGIM recently brought out its governance annual report
The recent governance annual report from Legal & General Investment Management has said what it has achieved, where it has failed and what its next steps are. It is 60 pages long. No one else in the UK produces anything like as comprehensive a report as this. Indeed if more shareholders could muster even a tenth of the engagement of LGIM, we would not have to worry about the Stewardship code, or shareholder engagment. The short form of the report gives a glimpse of what Sacha Sadan, the director of corporate governance, and his team have been up to.
The top themes discussed in meetings with corporates were board composition; climate change; corporate strategy; remuneration, and nomination/succession planning. The number of companies where LGIM voted was 3,332. The number of directors voted against globally was 3,864, up 37% compared to 2019. Over 100 UK chairs were voted against on gender diversity concerns. This again was the largest number of such votes; indeed in 2016 there were only 13 such challenges.
LGIM launched a fund aimed at promoting gender diversity - believing diversity of thought is crucial to the long term success of the businesses in which it invests. More key US resolutions on climate change and (separately) political lobbying to sway policy were supported by the fund and more resolutions on pay opposed by Legal & General than by any of the 10 largest US asset managers.
Active ownership means working to bring about real, positive change and create sustainable value, says Sadan. Last year was a turning point for those who care about environmental, social and governance issues, he says.
Following on from the failures of corporate stewardship, clients, regulators and governments are now concerned about getting companies to take these things seriously. Companies also asked how they could embrace ESG without hitting their bottom lines. Sadan replied that the board ought instead to highlight the risks of not doing ESG because many issues are financially material. Responsible investment strategies can help mitigate risks and should not require a trade-off in performance, he says.
LGIM helped pension fund trustees meet new ESG-related requirements and guidelines. It developed a tool of index funds to score companies according to ESG metrics, but also created a list of companies that fail to meet the minimum standards of business practices, where it will refrain from investing.
LGIM also lobbied and voted against Whitbread, which then owned Costa Coffee, because only one in 400 plastic cups were recycled. As a result Costa agreed by 2020 to recycle the same volume of cups that its takeaway customers used and in addition agreed a cash supplement for waste collectors for every tonne of cups collected. The company says that this should result in half a billion cups a year being recycled. The climate crisis carries significant financial risks so protecting the planet and protecting our clients’ investments should go hand in hand, says Sadan.
Eight companies were sold from the Future World fund following LGIM’s adoption of its Climate Change pledge. These companies are China Construction Bank, Dominion Energy, Japan Post Holdings, Loblaw Industries, Occidental Petroleum, Rosneft Oil, Subaro and Sysco Corporation – and it is interesting that all of these companies have since contacted LGIM to see what they might do to get reinstated. Separately, it voted against the utility companies Enea and Energa, which announced joint plans to build a large new coal power station in Poland, even as their main competitors move towards renewables. That project is now having great difficulty getting finance.
Shell previously had ‘an ambition’ to reduce its carbon emissions but was opposed to any binding targets. LGIM coordinated an open letter signed by 60 investors calling on the oil and gas industry to take responsibility for their emissions and additionally met and coordinated with other activists eight times to see the company. In December 2018, Shell announced comprehensive emission targets linked to executive pay.
LGIM have also challenged companies on pensions, arguing that everyone should pay the same percentage contributions, rather than – as now – with the executives getting much more. They had some success. They also challenged the right of directors to issue non-voting shares – regardless of shareholder concerns, though here they did not have so much traction. Non-voting shares in issue have gone from 2% in 1997 to about 10% now thanks largely to US technology firms going public.
LGIM is at least trying though.