Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Asset managers must do more – and not just on climate change

We are proud of our voting record on climate issues, but our engagement goes far beyond that – and we still can and must do more.

When asset managers have hit the headlines lately, it has rarely been good news. That has of course been painfully apparent over the past few weeks, but was also evident in a more subtle but insidious way.

The Guardian published an article highlighting not only the extent to which large asset managers invest in fossil-fuel companies, but also their routine opposition to shareholder motions related to climate change. And just today a report characterised some fund managers as being ‘too cosy with companies on climate crisis’.

Whether or not asset managers should have any exposure to oil and gas is a contentious topic, but it seems clear that where they do have voting rights in these stocks they should – at the very least – be cast in favour of greater transparency around businesses’ climate plans.

Almost every asset manager now espouses the importance of investing responsibly and reflecting environmental, social, and governance considerations into ESG-branded funds, but the Guardian article makes plain that many are not putting this rhetoric into practice.

At LGIM, we feel we can speak out on this topic because we do speak out. The Guardian’s analysis highlighted our longer-term record, and this year alone we have continued to consistently back ‘climate-critical’ shareholder resolutions.

Unfortunately, there is significant variation in industry practice. While the new research published today found many investors are too ‘cosy’ with companies on the climate crisis, it simultaneously praised LGIM as one of the ‘top five’ best performers in terms of its voting record on climate issues.

Where there is less variation is in the industry’s tendency to agree that investors selling out of high-carbon sectors will not solve the climate challenge.

While there remain buyers of fossil fuels, the mere act of divesting from companies owning those hydrocarbons will not reduce the impact on the climate from those fossil fuels being burnt. Nor does this necessarily mean climate-related risks have been reduced, if – as often happens in practice – divestment results in overexposure to seemingly low-carbon industries such as financials; i.e. to the lenders and insurers of the very same fossil-fuel assets.

We agree that engagement is preferable to divestment, but believe that forceful engagement is needed. As the new UK Stewardship Code recognises, “asset owners and asset managers play an important role as guardians of market integrity and in working to minimise systemic risks” such as climate change.

It is therefore incumbent on asset owners to raise their expectations; on asset managers to put a professed commitment to ESG principles into action; and on key intermediaries such as investment consultants, ratings agencies and proxy voting advisers to accelerate the process.

With the new code pushing investors for timely disclosure of their full voting record, alongside rationales for contentious votes (such as abstentions or votes against shareholder proposals), we expect to see more progress.

New: here’s resolutions

There are already some positive signs. Over the summer, the Harvard Business Review noted that the proportion of total shareholder resolutions focused on environmental and social issues had grown from around 33% between 2006 and 2010 to over 50% by 2017.

Morningstar has reported that during the 2019 proxy voting season, which ended in June, investors had their say on 177 shareholder resolutions addressing environmental and social concerns. The average shareholder support for these resolutions was 29%, up from 25% last year, and 14 resolutions won a majority of voted shares.

As investors become more engaged, it is also important not to take a narrow view of companies, but also consider the impact of wider issues like deforestation in supply chains, or of the emissions associated with companies’ products. The impact on government policy is also important, which is why LGIM is also a consistent supporter of resolutions calling on companies to review and suspend membership from any trade associations whose lobbying activities are inconsistent with the Paris Agreement.

With the emergence of the largest-ever group of investors calling on governments to step up their climate ambitions – a group LGIM has joined – it is essential that corporate lobbying is aligned with this goal.

Investors who are sceptical about such engagement should remember that these more muscular attempts to raise ESG standards via resolutions are not a zero-sum game; they benefit the entire market. By working together as asset managers, we can influence boards and improve corporate conduct.

E – and SG

Importantly, this isn’t and shouldn’t just be about the environment. The focus on environmental policies is understandable given the climate emergency, but we at LGIM are equally committed to social and governance factors.

We champion diversity through our engagement activities, for example. In 2018, we voted against more than 100 board chairs in the UK over the lack of diversity in their companies. We also regularly promote good governance practices through our votes, on issues such as board independence, auditor rotation, or the alignment of pension contributions between executives and the workforce.

Importantly, when we express our commitment to higher ESG standards through our entire voting weight – we vote as LGIM on every stock across our entire equity book, not fund by fund – it sends a powerful message.

Our clients and the market would benefit even more if the industry took a more consistent approach, encouraging investee companies to improve their practices and turning the direction of travel towards a sustainable future.