COVID-19 and threat of climate change drives increase in LGIM’s company engagements

• Tenth ‘Active Ownership’ report reveals a 21% increase in our company engagements in 2020
• Significant increase in climate change related engagements, of 63% year-on-year
• Launched new climate risk framework to quantify the physical and transitional risks within portfolios
• Opposed the election of 4,700 company directors globally in 2020 due to governance concerns
• Voted against the adoption of 37.5% of new remuneration policies at UK companies for failing to meet pay principles

2020 was an exceptional year for engagement. In March 2020 LGIM wrote to companies with constructive suggestions about how they could cope with the unfolding pandemic and resulting lockdowns, from supporting employees to raising capital. In addition to increasing focus on topics such as executive pay, board governance and income inequality, stewardship efforts have continued to shine a light on companies’ gender and ethnic diversity as well as the longer-term threat of climate change.

Engaging with companies to help reduce income inequality

In 2020, LGIM expanded its UK Principles of Executive Pay to highlight that it will increase scrutiny of those companies that have received support from government or shareholders – via additional capital or suspended dividends – or those that made staff redundancies, but continued to pay director bonuses.

LGIM was involved in 145 separate remuneration consultations -- up from 96 in 2019 -- covering policy changes to be put to shareholders at 2021 AGMs and additional uncertainties around the COVID-19 pandemic. In 2020, there were 341 proposals to adopt new remuneration policy at UK companies, with LGIM voting against the adoption of 128 (37.5%). Of those, 82 (64%) related to policies with post-exit shareholding requirements that did not meet LGIM’s pay principles.

In addition, LGIM asks all investee companies to ensure they are paying a living wage, or the real living wage for UK-based employees, and to ensure that ‘Tier 1’ suppliers are paying the living wage. Of the FTSE 100, including those it has engaged with, 43 companies are now paying the real living wage¹.

Continuing to drive best practice on board governance and in support of investor rights

At the start of 2020, LGIM announced its decision to vote against all companies where the roles of board chair and CEO were combined and over the course of the year, it voted against 411 companies with joint chair / CEOs. In North America alone, it voted against 280 directors with combined roles, and supported 42 shareholder proposals calling for an independent chair.

Promoting gender and ethnic leadership diversity

LGIM has increased its engagement on diversity issues in 2020, launching high-profile campaigns to drive greater ethnic diversity within boards, while engaging on gender and leadership diversity in Japan. Over the course of the year it:

• Opposed 55 directors in the UK over low levels of board diversity
• Voted against 10 Japanese companies including Olympus, Central Japan Railway and Kubota for failing to have a woman on their board. The scope of LGIM’s policy will expand to both the TOPIX mid400 companies and TOPIX 100 companies from 2021
• Engaged the 44 S&P 500 firms and the 35 FTSE 100 companies whose board membership showed a total lack of ethnic diversity. From 2022 LGIM will vote against the chair of the board or of the nomination committee is there is still no ethnic diversity at board level.

The report highlights LGIM’s strong voting stance, with more votes cast in support of shareholder resolutions on diversity, human rights or climate change than the majority of its peers. In 2020 LGIM have also strengthened their disclosures with a new platform publishing voting decisions the day after the voteⁱ

Tackling the era-defining challenge of climate change

Climate change remained the topic on which LGIM’s Investment Stewardship team engaged most frequently with companies in 2020 with 407 engagements, an increase of 63% on 2019. In addition, LGIM has sought to strengthen its climate analytics and solutions for clients, including:

• Expanding its Climate Impact Pledge engagement programme to a larger number of companies, with voting and divestment sanctions applied across more funds for companies falling short of minimum standards –
• publishing on LGIM website climate change disclosures for global companies
• Strengthening the way fund managers and analysts use climate data and expertise, leading to tangible investment actions
• Expanding its range of low-carbon investment solutions, including clean energy, fossil-free strategies developed with leading asset owners and products that overweight green bonds and the debt of companies with better ESG scores
• Continued advocacy for policies supporting ambitious climate action and a ‘green’ recovery
• Developed a new climate risk framework, Destination@Risk, allowing LGIM to quantify the physical and transitional risks within investment portfolios under a variety of climate scenarios, including a below 2°C scenario in line with the Paris Agreement.

This comes as the Legal & General Mastertrust and its default defined contribution (DC) pension funds announce a roadmap to net zero emissions by 2050, targeting -50% carbon intensity by 2025 in the main default.

Policy advocacy and collaboration to drive action and impact

In 2020, LGIM continued its longstanding policy advocacy, engaging with global policymakers and regulators on over 30 topics focused around three key areas: corporate governance and stewardship standards, achieving the Paris Agreement and net-zero targets and sustainable finance policy and regulation. As the UK prepares for the crucial COP26 conference in Glasgow this year, LGIM’s CEO is co-chairing the Business Leaders Group alongside the COP26 president, thus continuing our efforts to galvanise policy and business action on climate.

To read LGIM’s tenth Active Ownership report in full, please click www.lgim.com/activeowner