LGIM dials up engagement on nature, health and AI in latest Active Ownership Report

Legal & General Investment Management (LGIM), one of the world’s largest asset managers, has published its Active Ownership annual report, revealing how it voted and engaged with companies over the course of 2023.

LGIM’s Investment Stewardship team cast 149,000 votes at 15,580 meetings to drive long-term, systemic change on environmental, social and governance-related risk factors as it continues to seek to deliver sustainable value on behalf of its clients. Highlights of the report include:

• Environmental: LGIM expanded the scope of its environment engagements, with vote sanctions against 100 companies for failing to meet deforestation expectations, while 342 companies were subject to voting sanctions through LGIM’s Climate Impact Pledge. 2023 was a record year for climate-related shareholder proposals, with LGIM voting on 145 climate-related proposals, supporting 77% of these. In 2024, LGIM will be further increasing its expectations of mining and energy companies.
• Social: Raising awareness of the link between public health and financial resilience, with LGIM campaigning on Anti-Microbial Resistance (AMR) and nutrition, focused on *McDonald’s and *Nestlé. Activity also included a targeted human capital campaign on the living wage directed at 15 large food retailers around the world, and continued promotion of greater gender and ethnic diversity at board level and below.
• Governance: Continuing to protect and promote shareholder rights in the context of capital markets efficiency is a key governance focus. In the UK for example, the team is concerned that current proposals to improve capital market competitiveness have the potential to dilute key investor protections. Elsewhere, LGIM continued to scrutinise executive pay, supporting three quarters of UK remuneration policy votes but opposing 52% of pay proposals globally, due to companies not meeting our expectations for fair and appropriate long-term performance-based pay. The firm also published its expectations of tech companies around the governance of AI as an emerging stewardship risk.

With 2024’s AGM season underway, LGIM is focused on company engagement across its six ‘super themes’, focusing on Climate, Nature, People, Health, Governance and Digitisation. The team consists of 26 professionals with an average of 12.5 years’ experience, combining a global remit with local market knowledge and located in the UK, US, Japan and Singapore.

LGIM significantly expands its environmental engagement, setting stricter policies for both climate and nature

In 2023, LGIM strengthened its Deforestation Policy, increasing its minimum expectations for companies in deforestation-critical sectors such as consumer staples, materials and energy. The enhanced expectations resulted in vote sanctions against over 100 companies due to lack of a deforestation policy or programme in place. LGIM also set out a clear approach to broader nature risks and opportunities encompassing natural capital management, circular economy and water.

On the issue of climate, LGIM identified 342 companies within its Climate Impact Pledge subject to voting sanctions for not meeting its minimum climate-change standards.

2023 was a record year for climate-related shareholder proposals. Over the course of the year, LGIM voted on 145 climate-related proposals and supported 111 (76.6%). The vast majority of these votes were filed in North America (103), while 21 were filed in Japan and three in the UK.

In 2024, LGIM will continue to engage with companies through its Climate Impact Pledge to help manage the transition to net zero. In the current 2023-2024 engagement cycle, LGIM will introduce new baseline expectations for mining, power generation utilities and oil & gas. Companies in these sectors will be identified for vote sanctions if they choose to expand capacity of thermal coal mining and/or power generation, or in the case of the oil & gas sector, fail to disclose methane emissions. Vote sanctions will be applied in the 2024 AGM season, targeting the chair of the board.

Shareholder rights, executive pay and AI in the governance spotlight

On the issue of shareholder rights, LGIM has engaged extensively with consultations over the last couple of years to ensure our voice is heard when it comes to developing new or changing existing market norms and regulations to help drive capital markets efficiency in the UK.

In response to the FCA’s latest proposals, LGIM’s Investment Stewardship team remains concerned at the potential for a dilution in shareholder rights in favour of management. The three key concerns in the proposed changes centre on the intended permissive approach to dual-class share structures (DCSS), significant transactions and related-party transactions. LGIM will continue to monitor and engage on this issue, both individually and in conjunction with industry bodies.

On executive pay, LGIM supported 238 (75.8%) of the 314 remuneration policy votes proposed at UK companies in 2023. We voted against 120 (20.3%) of the 591 remuneration reports proposed, a slight reduction in negative votes compared to 2022 (21%).

However, LGIM voted against 86.5% (2022: 77.2%) of management-proposed pay proposals at US companies. Many of these related to performance conditions not being measured over a three-year period, a majority of long-term incentives not being linked to any performance conditions at all or becoming payable for below median relative performance. In 2023, 13 S&P 500 companies failed their ‘say on pay’ vote, five less than in 2022. LGIM voted against each of these firms.

From 2024, LGIM will apply additional voting sanctions on the ‘say on pay’ proposals at US companies where executives use corporate jets for private purposes, or where S&P 500 companies have underperformed relative to Index peers and CEO pay ratio exceeds 300x.

Looking ahead to emerging risks, LGIM believes investors must engage with companies and policymakers on baseline expectations for artificial intelligence (AI) governance, risk management and transparency.

In 2023, LGIM published its expectations of technology companies when it comes to the use of AI, with companies needing to demonstrate procedures such as:

• Governance: a board member accountable for AI oversight and strategy; board level education on AI risks.
• Risk management: safety risk assessments across the business cycle; ensuring AI is explainable; identifying high risk AI systems.
• Transparency: disclose risk and governance processes regularly; clarity to consumers or civil society when AI systems are used.

Diversity and the living wage remain priority “People” issues for LGIM

LGIM continued to push for improved gender diversity across executive leadership boards. In 2023, we voted against 75 companies across the FTSE 100 and S&P 500 on this issue, which illustrated that much more change is needed to improve the diversity levels of these all-important decision-making teams.

Japan was an area of particular progress for gender diversity in 2023. Following a three-year voting campaign by LGIM against TOPIX100 companies with all-male boards, the last TOPIX 100 company with an all-male board announced in September 2023 that it would appoint a female director at its 2024 AGM.

LGIM has identified progress on board-level ethnic diversity in the UK and US since we began engaging on the issue in 2020. Over the course of 2022 and 2023, when our engagement expanded to cover FTSE 250 and Russell 1000 companies, 30 of the 95 companies (31.6%) initially identified as not meeting our minimum expectations in 2022 had improved to an extent they were no longer considered as laggards.

As the cost of living continued to spiral amid high inflation, the issue of the living wage remained in the spotlight in 2023. LGIM believes that companies who fail to value their human capital increase their operational risk profile and can suffer from low productivity. In 2023, LGIM commenced a targeted campaign on the living wage with 15 of the largest food retailers around the world, tackling the issue across the operations and supply chains of firms such as Tesco, Costco, Walmart and Target.

Nutrition and AMR scrutinised as LGIM presses connection between public health and economic stability

LGIM recognises the strong link between social health and economic health. Every year, poor health costs approximately 15% of global GDP in the form of premature deaths and the lost productivity potential of workers.

LGIM continued its engagement on AMR in 2023, a risk that has been estimated by the World Bank as having the potential of causing a loss in global GDP comparable with the 2008 financial crisis. LGIM’s shareholder proposal at McDonald’s’ 2023 AGM, asking the firm to comply with World Health Organization (WHO) guidelines on the use of medically important antimicrobials in food-producing animals throughout its supply chain, received 18% of votes in favour, reflecting an increase in shareholder support for AMR.

LGIM has engaged with Nestlé over the past few years via the Access to Nutrition Initiative (ATNI) and ShareAction’s Healthy Markets Initiative, asking the company to apply a government-endorsed nutrient profiling model (NPM) and setting targets to proportionally increase the sale of products that are deemed healthy by a government endorsed NPM. In March 2024, LGIM co-filed a shareholder resolution at Nestlé (with ShareAction), calling on the company to introduce these changes and will continue to engage with the firm on this issue.