Strengthening stewardship and engaging for change

Even in challenging circumstances, it is still worth taking the time to recognise the positive, constructive role that investors like LGIM can play in the world.

In recent weeks, the team and I, alongside colleagues across the business, have been busy working with companies, other investors and regulators to support investee companies.

Our message has been clear: now more than ever, companies need to think about stakeholders, from employees to suppliers. And indeed, we have seen many companies step up, pledging their skills and resources to the fight against COVID-19, showing judgment in balancing the expectations of their staff, shareholders and society.

We are in uncharted waters, but there are still time-tested principles to guide us. It is clear that sustainability, good governance, fair pay and decent employment will be the building blocks of a better future. These are principles we believe in; LGIM has for a long time been using its influence to support them. Today marks the publication of LGIM’s ninth annual Active Ownership report, showing the action we are taking on behalf of our clients to raise standards across companies and markets.

As a global investor, the report is focused on issues which are relevant and far reaching:

• Through our Climate Impact Pledge, we have encouraged some of the world’s largest companies, like oil major BP, to accelerate the race towards net zero emissions that scientists tell us we must urgently win.

• We’re driving forward the gender agenda – encouraging companies and markets that lag behind to improve their board diversity, but also to think about their recruitment and promotion practices, from board level through to executives, management and the workforce. From the US to Japan, we have seen companies improve, and where companies fall short we will use our shareholder power to drive change: in 2019, we voted against 190 directors presiding over boards with no or low diversity.

• We continue to push for fair pay, encouraging companies to adopt a Living Wage, and challenging pay that is not adequately aligned with performance. And although much remains to be done – in 2019, we opposed around a third of all pay packages we voted on – there is also progress. For example, around a third of FTSE 100 companies have now reduced executives’ pensions to be aligned with the workforce.

• We continue to find new ways to use environmental, social and governance (ESG) data – last year, we launched 14 strategies explicitly linked to ESG criteria, across a number of asset classes, investment styles and fund structures. In 2019, we also identified 98 companies with poor social and governance scores – for example, unfair treatment of employees – and we wrote to their board chairs with suggestions for improvement. And with a Global Sector Research Framework now established to unify our engagement efforts and bring together the best expertise across LGIM’s investment teams, we look forward to taking our ESG offering to the next level.

We know our clients care passionately about these issues. And we also know that regulators are watching closely – we encourage the increased scrutiny! In 2019, we continued our work with regulators, and we were pleased to see many of our suggestions reflected in progressive new policies, such as the revamped UK Stewardship Code or the EU Climate Law.

Recent events have reminded us of the importance of resilient markets and companies, reaffirming our resolve. Consider an issue like ‘overboarding’, where directors serve on many simultaneous boards. Even in normal circumstances, the pressures of the role are significant; they can become overwhelming if you have to deal with seven companies all having emergency COVID-19 board meetings. That is why we will continue to push for the key pillars of good governance, working to ensure directors and auditors have the time, skills and independence to ensure robust oversight of companies.

Some things do not change, though I will note one thing that has – our team name, from “Corporate Governance” to “Investment Stewardship”. The new name reflects the evolving roles and responsibilities of investors, as we are increasingly expected to demonstrate how our allocation of capital can help deliver benefits not just to corporate shareholders and bondholders, but also to the broader society. We are truly all in this together.

I hope you will find the report informative, with plenty of case studies of how – both through our direct action, and collaboration with investors and governments – we are trying to contribute to a world worth living in.