WHAT WE KNOW
Corporate governance covers a broad remit of financial and extra-financial elements,
from how a company is managed to the rights of shareholders. It is about looking
after the long-term interests of shareholders, by voting and engaging directly with
the companies we invest in and ensuring that they have the right structure in place
to manage their own risks and opportunities.
We are also aware that individual shareholders lack the influence to ask difficult
questions on how companies are impacting society, the economy and the environment.
Therefore the responsibility of institutional shareholders is to take this challenge
to large companies on behalf of the individuals they represent. For Legal &
General this means representing the views of our seven million retail clients.
Legal & General Investment Management (LGIM) is a major investor in the UK and
also a significant shareholder of equities and fixed income assets globally.
View textual description
We are committed to using our position of influence to help improve board practices
and performance in the markets in which we invest. This involves engagement with
investee companies directly and collaboratively with other institutional investors.
In recent times, we have witnessed an increase in investor activity globally as
demonstrated by shareholder proposals being put forward at general meetings. These
proposals range from the removal of directors from the board and the appointment
of shareholder nominees to calls for increased transparency on environmental and
social issues. They highlight some of the key risks which we would expect management
to respond to in order to protect shareholder value.
As an industry, we are more focused on the ‘mainstreaming’ of responsible
investment rather than developing a traditional ethical funds approach. This is
evidenced by the Eurosif study published in 2010 – European Sustainable and
Responsible Investment (SRI) Study, which demonstrated that the European SRI market
had significantly grown to €5bn to the end of 2009, with a broad responsible
investment approach representing nearly 80% of the overall assets.
A remarkable growth in the number of UN Principles of Responsible Investment (PRI)
asset owner/manager signatories (since inception in 2006 to current level of 813
as at October 2010), also signals the industry’s effort towards collaborative
engagement to address the responsibility of asset ownership globally.
In June 2010, the Financial Reporting Council (FRC) issued The UK Stewardship Code–guidelines
designed to aid engagement between companies and their shareholders. 122 asset managers/owners
have signed up to the code to date and the scrutiny over the practice of asset managers
has further magnified.
WHAT WE ARE DOING
AT LEGAL & GENERAL GROUP
We continue to build the case for other companies to undertake good ESG governance
as part of doing business. Since the recession, we have re-run the Business in the
Community “Value of Good Governance research” we worked on in 2008 to see how the
recession has affected the link between good ESG (Environmental, Social and Governance)
and TSR Total Shareholder Return (TSR). The results signaled to the investment market
and business in the community members that good management of ESG risk can help
businesses. This was published in the FT in June in line with the BITC CR Index
for 2009 being launched.
We have also supported BITC in challenging ESG engagement in alternative to models
such as Private Equity by participating in roundtables with these businesses to
encourage this important agenda in alternative sectors.
AT LEGAL & GENERAL INVESTMENT MANAGEMENT
- LGIM has conducted 170 ESG driven engagements in 2010.
- We expanded the voting coverage from UK and top 100 North American companies to
developed markets worldwide during 2010. By the end of the year, our voting coverage
included most developed markets, which constitute c.97% of overall equity assets
managed.
- During 2010, we welcomed the FRC’s UK Stewardship Code which advocates transparency,
collaboration and effective communication of robust voting and engagement activities
to clients. In September LGIM registered its compliance, having made specific reference
to each of the principles in our corporate governance policy.
- We also became a signatory to the UN PRI in September as we strengthened the capability
to address overall ESG issues in our holdings. We have also participated in their
case study and guidance notes for passive asset owners and managers. It highlights
how we actively manage passive assets and the approach taken to expand the voting
coverage to overseas markets.
- We continue to engage collaboratively with other investors through forums such as
the Association of British Insurers and UK SIF (Sustainable Investment and Finance)
association. We also engaged with NGOs and other stakeholders on key ESG topics
that can affect the value of our holdings.
INDUSTRY AND REGULATORY CONSULTATIONS
As a major shareholder in global companies, we consider it important to try to shape
the future of corporate governance and to improve best practice. One of the most
constructive ways to achieve this is by responding to industry consultations. We
have responded to the following consultations during 2010:
- The FRC’s Stewardship Code
- The BIS consultation on the future of narrative reporting
- The BIS consultation on a long-term focus for corporate Britain
- The European Commission’s Green Paper on corporate governance in financial institutions
and remuneration practices
- The Tokyo Stock Exchange’s listing rules and systems for investors
Looking forward
Environmental, Social and Governance (ESG) Integration
While ESG topics can be looked at individually, we are increasingly focusing our
effort on ‘integration’. That means we may look at environmental issues with their
social implications, link sustainably issues with governance structures and address
how all such issues are integrated into the general investment dialogues with companies.
As a result, our target for 2011 has been aligned with this approach by measuring
the proportion of each ESG component to the overall number rather than a standalone
number. In practice we will be tracking every engagement to see if it covers any
of the ESG aspects. We have committed to engage with 200 companies on ESG issues
(at least 20% of which to include topics on environmental and/or social issues).
Playing the long game
Managing assets on a passive basis in Index Tracking funds lead to long-term holdings
that allow us to build meaningful relationships with companies over long periods.
As such we can address issues which may not be material today or tomorrow. We intend
to strengthen our research in identifying key medium-to-long-term ESG risks that
our clients’ investments are exposed to and address them over time as the
external environment, such as regulations and the impact of climate, continuously
change.