LGIM Prioritises Climate Risk in Corporate Engagements

UK manager also highlights social issues as pandemic increases focus; willing to escalate unresolved ESG issues.

Legal and General Investment Management (LGIM) increased its engagement with corporates on climate-related risk by 63% in 2020 compared to the previous year, according to the firm’s latest ‘Active Ownership’ report. LGIM saw a 21% overall company engagement increase across ESG-related issues.

This follows LGIM’s expansion of its Climate Impact Pledge engagement programme, originally launched in 2016 and focused on just 80 companies, which aims to help the firm achieve net-zero carbon emissions by 2050.

In October 2020, LGIM launched its new climate risk framework, Destination@Risk, which allows the firm to better quantify physical and transitional risks within investment portfolios across a variety of climate scenarios, such as a below 2°C scenario aligning with the Paris Agreement.

Using the framework, LGIM has been able to identify companies that aren’t addressing climate risk as efficiently as others, prompting more active involvement from the firm to force more drastic change, reflected in its voting activity and capital allocation.

“Our framework for responsible investing is based on stewardship with impact and active research across our different asset classes. This enables early identification of potential risks that threaten the sustainability of returns,” said Sonja Laud, CIO at LGIM.

In 2020, LGIM’s Investment Stewardship team had 891 engagements with 665 companies, compared to 739 engagements with 493 companies the year prior. These took place via meetings or calls (295) or through written engagement (596).

While the majority (407) of these centred around climate change, 234 focused on remuneration, 174 on diversity (gender and ethnicity), 94 on board composition and 92 on strategy.

LGIM engaged most with BP (nine engagements), Tesco (seven engagements) and Rio Tinto (six engagements).

Accountability during the pandemic

COVID-19 has also enhanced the firm’s focus on social issues.

LGIM expanded its UK Principles of Executive Pay guidance, emphasising it would closely scrutinise corporates receiving support from governments and shareholders due to the pressures of the pandemic. For example, corporates that received support but have made staff redundancies while continuing to pay director bonuses will be held accountable.

In the UK alone, LGIM voted against the adoption of 37.5% of new corporate remuneration policies last year because they failed to meet the firm’s updated pay principles.

LGIM has asked all investee companies to ensure they are paying a living wage. Currently, more work needs to be done as, of the FTSE 100 companies (including those LGIM has engaged with), just 43 corporates are paying the real living wage.

“The COVID-19 pandemic brought into sharp focus the need to take action now to address the threats facing our societies. Our message to companies has been clear – focus on all stakeholders, not just shareholders. The pandemic and the events of 2020 have exacerbated many of the social issues that we have been increasing engagement on for many years, including inequality and ethnic diversity,” said Sacha Sadan, Director of Investment Stewardship at LGIM.

Escalating the issue

Where engagement with corporates hasn’t yielded results, LGIM has sought to escalate its involvement, including collaboration with other institutional investors directly (or via investor networks) in order to amass more voting power.

“We have a number of escalation options at our disposal, from voting sanctions through to divestment from the securities of an unresponsive company in select funds,” the report said.

LGIM uses proxy advisory firm Institutional Shareholder Services’ (ISS) ProxyExchange voting platform, but notes that it doesn’t automatically follow the recommendations of proxy advisers, having implemented a ‘custom’ voting policy. LGIM’s voting stance in pooled FTSE index funds differed from ISS recommendations in 9% of votes last year.

The firm is also tracking the impact of its engagement. Last year, LGIM wrote to companies with poor ESG scores and has noted overall improvements at over two-thirds of these targeted companies (68%).

LGIM has further increased transparency of its voting activity for its clients and other interested parties to better hold the firm to account. Its vote disclosure webpage provides daily updates of its vote instructions and disclosures of all votes, with a lag of one day following the shareholder meeting.

“To ensure that our voting decisions are aligned with the wishes of our clients, we undertake regular catch-up meetings with the ultimate owners of the assets we manage,” the report noted.

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