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February 2020

Investing in a better world

How we’re rising to the challenge posed by a rapidly changing world on behalf of our investors

When we pool our customers’ money and invest it in companies, we have the muscle to demand that they behave responsibly. We’ve been doing this for years and have raised concerns about everything from carbon emissions to gender diversity. And while some companies have worked with us to resolve them, we’ve taken tough action against those that are slow to change.

It’s part of our strategy to improve returns for both retail investors and the pension funds that many of us pay into, through the integration of environmental, social and governance (ESG) considerations. These include things like climate change, diversity, human rights, and boardroom pay – we believe companies that score highly against such criteria are likely to be better run and face fewer regulatory and political risks.

Combined with our commitment to active ownership – through which we strive to raise standards and vote against boards that we don’t believe are doing enough – and our analysis of long-term investment themes, we can make a difference for investors and society as a whole. Some of the key issues we’ve been actively engaging with company boards on are sustainability, gender diversity and excessive executive pay.

While initially reluctant, Royal Dutch Shell agreed to introduce industry leading emissions targets after pressure from LGIM and other investors”

Demanding sustainability

Companies listen to us because we are one of the world’s biggest asset managers. While initially reluctant, for example, Royal Dutch Shell agreed to introduce industry leading emissions targets after pressure from Legal & General Investment Management (LGIM) and other investors1.

And after we raised the need to recycle single-use disposable cups with Whitbread plc, the company announced that its Costa coffee shops would recycle the same volume of cups that its customers used – estimated at around a billion a year. We don’t claim to be sole driver of this decision, which took place amid growing public demands over the use of plastic, but believe our voice helped push the company in the right direction.

Sustainability Analyst Iancu Daramus explains: “As part of our ESG offering we engage with companies and vote at their annual general meetings. So, for example, we have an entire programme around climate-related engagement, called the Climate Impact Pledge. We do a very complex assessment of what they should be doing on climate change – their strategy, their targets and how they lobby governments – and then we basically give them homework. We might say there are three, or five, or 10 things they must do by the following year. If they don’t give sufficient evidence a year later that they have improved, then we will vote against the Chair and also divest the company from certain funds.”

In our annual Active Ownership report, published last year, we revealed that in the US we supported more shareholder resolutions on climate change in key votes than any of the world’s 10 largest asset managers2. Now, for the second year running, we have announced the Climate Impact Pledge, highlighting the positive steps taken by companies like Toyota, Total and Allianz. And we named the companies that did not perform so well, voted against several Chairs and removed 11 companies from our Future World fund range – depriving them of our clients’ money.

 

 

 

 

Tackling excessive rewards

Excessive rewards for senior executives is another area where we’re making a difference. We want executive pay to be linked to the long-term performance of a company, not short-term goals. One area of particular concern is executive pensions, which have been used as an alternative way to reward senior people as salaries and bonuses have come under the spotlight. We’re working to make sure that executives receive the same level of pension contributions as the rest of the employees. We have seen progress, with around a third of the UK’s largest 100 companies reducing pensions to be more aligned.

Diversity of thought is also critical to the success of companies, so creating gender-balanced teams is essential. In 2018 we voted against the chairs of more than 100 UK companies on the issue of gender diversity. This is not just a UK issue, however, and since 2017 we have been voting against all-male boards of S&P 500 companies. From this year we will extend this approach to certain large companies where the boards have less than 25% women.

We’re also using our voting rights to shed light on inappropriate lobbying, including through trade bodies. We were among a coalition of investors that wrote to 55 European energy, mining and transportation companies after a news leak suggested that a large trade body was planning to oppose greater EU action on climate change. We warned that lobbying that undermined the Paris Agreement represented a financial risk to companies and their investors.

We’ve consistently supported resolutions calling on companies to disclose how they are lobbying governments, and have seen them take action. Shell, for example, has now left a US refining group due to differences over climate policies.

Whitbread plc announced that its Costa coffee shops would recycle the same volume of cups that its customers used – estimated at around a billion a year”

Making boards more effective

Other issues where we are actively engaging with companies include the composition of boards. We believe that the chair and CEO roles should be separate to provide a balance of authority and responsibility. We have been engaging with Tesla, suggesting ways to improve how the electric car company is run. Last year, we opposed what has been dubbed ‘the world’s biggest bonus’, to be collected by its CEO over a decade. We had also repeatedly expressed our concerns that CEOs should not be allowed to ‘mark their own homework’ by also serving as chairs of the board. Under pressure from the regulator and other investors, we were pleased to see Tesla decide to split the two roles in late 2018.

We are also concerned about the quality, independence and regulation of company auditors. Our trust in auditors has been further shaken by accounting scandals involving major businesses, including General Electric and construction firm Carillion, and we regularly vote against companies because of audit-related concerns.

As a large, global asset manager, we have a responsibility to tackle all of these issues on behalf of the people who entrust us with their assets. And because of our scale, by demanding that companies behave more responsibly, we can deliver better long-term returns and tackle many of society’s challenges.

  1. All information on corporate engagements and stewardship activity is sourced from LGIM, as at 2019.
  2. Climate 50/50 Project – Asset Manager Climate Scorecard 2018, analysis of the voting records of the world’s 13 largest asset managers that report mutual fund votes, focused on resolutions at US energy and utility companies.
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