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June 2020

Encouraging companies to act responsibly: LGIM Active Ownership report

From narrowing the executive pay gap to lowering oil majors’ carbon emissions, we continue to work on behalf of our investors and wider society

Two engineers at wind farm, walking together

We’ve taken action against 11 companies named as laggards under our Climate Impact Pledge, as we continue to put pressure on investee companies to behave responsibly. Legal & General Investment Management’s (LGIM’s) latest Active Ownership report shows that in 2019 we tackled companies on everything from climate change to excessive boardroom pay and the suitability of directors.

Our Climate Impact Pledge is our commitment to engage with some of the world’s largest companies on their strategic management of climate change. We rank these companies on a wide range of indicators and while it was encouraging to note an increase in average scores, we divested from five companies in our Future World fund range, including oil giant ExxonMobil, largely because of a lack of strategic awareness of climate change.

We also co-filed our first-ever shareholder resolution; calling on another oil company, BP, to explain how its strategy was consistent with the Paris Agreement on climate change. In this case, we worked closely with the company’s board and BP has now announced industry-leading emissions targets.

In another example of how we are making our voice heard on climate change, we opposed a plan by Polish utilities Enea SA and Energa SA to build a large coal-fired power plant. We have since expressed our concern privately to the companies and in the press. Our concerns were cited in a shareholder lawsuit against the company, filed by environmental law group ClientEarth. In a world-first climate-risk case, a Polish court has upheld ClientEarth’s complaint, revoking the initial decision to build the plant.

Focusing on executive pay

Our focus on responsible investment goes beyond climate-related issues and one of our areas of focus is executive pay. The average salary of a FTSE 100 CEO has jumped from around 40 or 50 times that of an average UK worker in the mid-1990s to around 117 times today. LGIM is committed to narrowing that gap.

In 2019, we opposed 35% of executive pay packages globally and voted against the chairs of 17 remuneration committees. This year we will be strengthening our policies on executive pensions and will tackle any companies where executive directors do not retain a significant amount of their in-post company shareholding for two years following departure. This measure is designed to reduce the chance of executives taking undue risks.

Offshore platform in sea against cloudy sky
“More than half of fund managers had no climate change-related voting policies or guidelines. This is utterly unacceptable. There are of course some notable exceptions… Legal and General’s Future World fund range withdraws investment in companies who don’t engage with climate change”
Guy Opperman,
MP Minister for Pensions and Financial Inclusion

Opening up political lobbying

We are also a top supporter of resolutions on the transparency of political lobbying. If companies spend investors’ money on lobbying governments, we expect them to account for how and why they do this. In 2019 we supported shareholder proposals calling for companies to report on their political spending, including proposals filed at US auto manufacturers Ford Motor and General Motors.

As a result of LGIM and our peers’ ongoing demands, a number of companies have now taken positive steps. These include oil major Shell leaving a US refining trade body due to differences over climate policy, and mining giant Rio Tinto putting trade groups on notice if their lobbying undermines the goals of the Paris Agreement.

We also believe that gender diversity at board level provides a range of viewpoints that are important for a company’s success and we are pushing companies to ensure that the proportion of women on their boards is at least 30%. For more than three years, as part of a coalition with other global investors, we have engaged with 72 S&P 500 companies that had all-male boards. At the time of writing our latest Active Ownership report there were no longer any all-male S&P 500 boards.

In 2019, we also extended our global focus to improve gender diversity at board, executive and management level at 19 Japanese companies. Twelve of these companies improved their gender diversity score.

Promoting good governance

We believe having robust governance processes can help companies stay profitable and focus on growth. By contrast, badly run companies may take a serious hit to their margins, go bust or even risk the security of staff and customers. It is therefore very important that those in leadership positions act honestly and with integrity and that they have the time and skills to dedicate themselves to their roles. In 2019, we engaged with companies on governance issues 379 times.

For example, we had long-standing concerns regarding Metro Bank because of a lack of independent directors on its board, poor gender diversity, a pay structure not in line with best practice, and failure to manage conflicts of interest. Our concerns were compounded last year by the disclosure of accounting errors within its loan book.

In response to pressure from us and other investors, Metro Bank began to address these long-standing governance concerns. Both the chair and CEO agreed to step down. The bank also announced it would sever ties with InterArch, an architecture firm owned by Metro Bank’s chairman’s wife, that had received over £25 million in payments since 2010.

Our Active Ownership report shows exactly how we’ve been working to ensure our investments are good for both society and shareholders. You can read the report yourself on our website.

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