We want the companies we invest in to behave responsibly. We believe that, in the long run, this is not only good for society but is also the best way to build long-term value for shareholders. Often, we work collaboratively with the boards of these companies towards mutually agreed goals but on other occasions we flex our muscles and demand change by voting against boards, or even excluding companies from some funds, depriving them of capital.
We monitor the companies’ performance on environmental, social and governance issues. And we aim to ensure that, for example, businesses limit their impact on the environment, are properly managed and that executive pay is appropriate. Below we’ve listed five companies where we have sought change in recent months. Some, like Barclays, have worked with us collaboratively to develop impressive future plans, while some others have proved more challenging.
Exxon Mobil
The oil giant’s refusal to set broad, ambitious targets for its carbon emissions placed it at odds with its peers and was a source of concern as the transition to clean energy leads to uncertainty over the long-term prospects of the fossil fuel industry. The board also resisted efforts from shareholders to appoint an independent Chair, which we believe provides better accountability and oversight.
In June 2019, under our Climate Impact Pledge, which ranks corporate climate leaders and laggards, we announced that we would be removing ExxonMobil from certain funds and would vote against the Chair of the Board. Ahead of the company’s annual general meeting in May 2020, we also announced that we would be supporting shareholder proposals for an independent Chair and a report on the company’s political lobbying. There were more than 40 articles about our voting intentions in major news outlets around the world. At the AGM, 30% of shareholders supported our proposals, sending an important signal to the company.
Wirecard
When German fintech firm Wirecard announced it would issue a bond to raise capital, our early research raised a red flag about the company’s governance. In particular the Financial Times had reported suggestions of accounting irregularities at the company. When the company announced it would use the funds raised to pay off existing bank loans this raised further concerns – the suggestion that the banks wanted exposure to Wirecard off their balance sheets required further investigation.
LGIM met with the company’s management and found that its responses to accounting allegations were unsatisfactory and gave credence to the issues outlined in the FT article. Given our concerns, none of our actively-managed funds invested in Wirecard and we cast a vote of no confidence in the management at its 2019 annual general meeting. On 25 June 2020 Wirecard filed for insolvency after admitting that the €1.9 billion of cash on its balance sheet did not exist. Its former CEO Markus Braun was arrested on suspicion of false accounting and market manipulation.
Novartis
In May 2019, Novartis received approval from the US Food and Drug Administration (FDA) for a drug called Zolgensma, which was developed by its subsidiary AveXis. The drug was approved for children up to two years of age suffering from the deadly muscle-wasting disease spinal, muscular atrophy. It is to date the world’s most expensive drug.
In mid-March 2019, Novartis was alerted via AveXis to allegations of data manipulation in the drug’s development but after an internal investigation Novartis did not alert the FDA to its initial findings until the end of June. The FDA carried out on-site inspections and outlined its concerns over the lateness of this disclosure, but continued to support the drug.
We met with Novartis and made clear our disappointment that the company had not contacted the FDA immediately and that we expected the issue to be reflected in decisions on executive pay. In the company’s annual report, the CEO requested that he not receive an incentive pay-out for his ‘building trust with society’ objective because of the issue.
Enea SA/Energa SA
Enea planned to build a large coal-fired power plant at Ostrołęka C, in a joint venture with another major Polish utility (Energa SA). Both companies approved the highly polluting project without having secured funding for it, even as it risked being permanently unprofitable due to increasingly stringent EU regulation and cleaner, cheaper alternatives.
LGIM opposed the proposal at Enea’s extraordinary general meeting in 2018. We also expressed our concern both in letters to the company and publicly in the press and our concerns were cited in a shareholder lawsuit against the company, filed by environmental law group ClientEarth. In August 2019 a Polish court upheld ClientEarth’s complaint, revoking the initial decision to build the plant. Following the court’s decision, shares in Enea rose and early in 2020 the companies announced the cancellation of the project.
Barclays
At the end of March, Barclays plc published a statement outlining ambitious targets for aligning the entire business to the goals of the Paris Agreement on climate change through plans to shrink its carbon footprint to net zero by 2050. LGIM endorsed this proposal, which was voted on at the company’s annual general meeting. We have long considered climate change a key risk for financial institutions such as Barclays and for the past two years we have had extensive discussions with the company on its strategic approach to the issue.
An important catalyst for these discussions was the filing of a shareholder resolution by non-governmental organisation ShareAction and other co-filers in December 2019. Since the beginning of the year we have been involved in private discussions between the Barclays board, ShareAction, the Investor Forum and other large investors to secure an outcome they could all support. Our focus will now be on helping Barclays with the detail of its plans.
*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.
The value of an investment and any income taken from it is not guaranteed and can go down as well as up; you may not get back the amount you originally invested.
Sources:
- Legal & General Investment Management Active Ownerhip Report 2019
- Legal & General Investment Management ESG Impact Report, Q2 2020