How your pension can change the world

Written by Rebecca O'Connor on 25th April 2016

Board diversity, cyber security, tax transparency and climate change all have one thing in common: they are all relevant to the long term financial best interests of investors, according to Legal & General, the UK’s biggest pension fund manager.

These areas all come under the heading “corporate governance”. Once considered the  boring box-ticking section of reports that no one reads, governance is now rising up the agenda, as a better record on things like climate change and fair pay has increasingly become linked with more profitability in the long term.

L&G said its fifth annual corporate governance report shows the positive impact of “active” share ownership – when investors challenge the companies they invest in to improve their records on things such as carbon emissions, diversity and supply chains.

The fund manager is among a number of large financial institutions that are increasingly challenging the companies they invest in on their environmental and social records.

It argues that this benefits its customers financially, as well as benefiting the rest of the world.

So if your pension pot is managed by L&G, you can feel pleased that your life savings are tackling some of the world’s biggest problems, rather than adding to them.

Luckily, it is not alone in the City in taking such issues seriously.

Hermes Asset Management, which manages the BT pension fund, Newton Investment Management and Standard Life are all cracking the whip against companies with bad habits.

Share Action, the investor campaign group, has ranked asset managers for their responsibility.

Sacha Sadan, director of corporate governance at L&G, said: “The world of governance continues to evolve rapidly and we are pleased to report on our efforts in this changing world. Our role is to help bring positive change to the companies in which we invest, using our influence to ensure that companies integrate environmental, social and governance (ESG) factors into their culture and everyday thinking. We also aim to encourage markets and regulators to create an environment in which good management of ESG factors is valued and supported.”

L&G on climate change:

  • As a non-party stakeholder who has joined the Paris Pledge, we have clearly stated that we support efforts to keep the world on a trajectory that limits the global warming temperature rise to less than 2°C. At the BP and Royal Dutch Shell AGMs in 2015, we supported the ‘Aiming for A’ shareholder resolutions relating to climate change. For more detail, our Climate Change Policy can be found on our website.

L&G on food waste:

  • The cost of food waste in the UK is estimated to be around £12bn. This affects not only corporate profits, but has a wider environmental and social impact. LGIM has engaged with Tesco, Sainsbury’s, WM Morrison and Marks & Spencer to find out what they were doing to tackle food waste and encouraged them to do more.

  L&G on quarterly reporting:

  • Interim management statements, known as quarterly reports, have long been pinpointed as a catalyst of short-term behaviour. We therefore decided to lend our support to companies considering discontinuing their quarterly reports by writing directly to the chairs of all the FTSE 350 companies. A number of companies – including Legal & General – have dropped quarterly reports.

L&G on good corporate reporting:

  • We believe good transparency by a company improves accountability and promotes effective communication with stakeholders. During our engagement with companies, we gathered intelligence on companies that we consider to provide good corporate reporting in environmental, social and governance issues. Following this, in partnership with the global recruitment firm Heidrick & Struggles, we put together a report which includes examples of best practice.

L&G on ESG reporting in Asia:

  • There is tremendous momentum towards strengthening corporate governance standards in Asia, with local stock exchanges leading the dialogue. During 2015, we engaged with various stock exchanges directly and participated in a consultation facilitated by the Hong Kong Stock Exchange to improve ESG reporting by companies. Our recommendations, along with other key ESG investors, led the Hong Kong Stock Exchange to publish much improved ESG guidelines, which are now incorporated in their listing rules

L&G on executive pay:

  • For many years we have been requesting that companies simplify their remuneration structures by operating only one long-term share scheme. The number of companies having more than one remuneration scheme is down from 43% three years ago to 18% today. LGIM has voiced its concern at the use of matching shares and multiple schemes that reward management for the same performance. LGIM will continue to vote against any new matching schemes, or amendments to existing schemes, as well as opposing multiple schemes unless there is a genuine exceptional case for them.

L&G on corporate tax:

  • The way in which company tax payments can be altered through new tax rules is a significant concern for investors. In 2015, together with the PRI (Principles of Responsible Investors), we published a global guidance document which outlines case studies of best practice and expected tax disclosure from companies. Our message is that we want the companies in which we invest to provide their tax policy, an outline of their tax governance and to articulate their key tax-related risks.

L&G on diversity:

  • The composition of a company’s board of directors is critical to the quality of the decisions they make, and therefore inextricably linked to the long-term value of the business. In 2015, we wrote to the chairs of the remaining 26 companies in the FTSE 250 with all-male boards to request a meeting to specifically discuss diversity at board level. Following this engagement project, we voted against a number of company board chairs for a lack of response and a continued absence of a robust diversity policy or female talent on the board.