How do professional investors encourage companies to improve? By engaging with them. Whether it is lobbying for change, voting at an AGM or holding private meetings with management, there are plenty of ways that fund managers can help businesses boost their ESG credentials.
Engaging with companies helps them avoid controversies or litigation battles, improves their reputation and transparency, and enables planning for a more sustainable future.
Marion Plouhinec, senior ESG analyst at L&G, says engagement has never been so important as the Covid-19 pandemic has highlight the importance of good corporate governance, social practices and the need to care for the environment. “The crisis has shown that good ESG practices matter,” she says. "We continued to engage with companies last year and held digital meetings to talk about the impact of Covid, their strategies and human capital."
Climate Impact Pledge
L&G is also one of a number of investment giants which have made a commitment to fight climate change, along with the likes of BlackRock. Plouhenic points to Japanese automaker Subaru (9778) as example of a stock that L&G has reinstated in its investments following engagements, which led to significant improvements in emission targets and climate disclosures. Meanwhile, three-star rated Dominion Energy (D), was reinstated in L&G's funds in 2019 after improvements and went further in 2020 by adopting a target for net-zero emissions.
At the other end of the spectrum, however, L&G has a so-called blacklist of companies it will not invest in. This currently comprises 13 companies including as Metlife (MET) and China Construction Bank (601939) - both three-star rated by Morningstar.
The need for engagement becomes particularly clear when investing in areas which are not obviously sustainable such as financial services or oil giants. Rathbones’ Stewardship director Matt Crossman has engaged with companies such as three-star rated Barclays (BARC), five-star rated Exxon Mobil (XOM) and four-star rated Chevron Corp (CVX).
He points to Exxon Mobil as an example of a company which "had consistently failed to listen to growing concerns by shareholders on the danger that climate change poses to the company’s operations". This led to Rathbones supporting the shareholder resolution calling for an independent chairman to be appointed at the company.
However, only 7% of shareholders voted against the re-election of the chairman. “Although there was not enough opposition to defeat their re-election, it was notable as the first time we have voted against the re-election of a director based on a company’s lack of response to the climate crisis,” says Crossman. Legal & General and BlackRock also took similar positions and voted against the chairman.
Why Diversity Matters
Another engagement that stand out is the one with US big pharma company Pfizer (PFE), which does not publish for either is US or global workforce the same unadjusted gender pay gap statistics, which are now routinely published by companies in the UK. (This is the median pay gap statistic, which is a better figure for demonstrating how well women are represented across a business).
“Diversity is a key governance concern at the companies in which we invest, with evidence demonstrating that more diverse boards can lead to outperformance,” adds Crossman, who is very supportive of proposals calling for improved transparency on companies' gender pay gap.
“Although this failed to pass [the shareholder resolution gained 36% support], it is a useful indicator to the board that shareholders wish to see improved reporting and disclosure on the global median pay gap," he says. "We will continue to encourage the board to adopt better standards of reporting to minimise the risk to our investments brought about by companies demonstrating poor practice towards gender equality."
Meanwhile, L&G, which is also focused on gender diversity issues, last year broadened its engagement in diversity to include ethnic diversity. Plouhinec says: “We have written to 44 S&P 500 companies and 37 FTSE 100 companies, which have shown total lack of diversity, asking to to have at least one director from minority background in their board by end of 2021.”
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