Investment management giant wields its power to avert climate catastrophe

As more than 100 Extinction Rebellion climate change activists are arrested for blocking roads in central London a stark warning has been sent that the world is facing a climate catastrophe and businesses around the world must address it urgently or face the ultimate sanction of shareholders withdrawing their support.

However, the message was not issued by an environmental action group but from Legal & General Investment Management, the UK’s largest money manager, with £1 trillion worth of pension fund investments.

Climate came top of a list of concerns about the way business is run, but the giant is determined to wield the power it has in order to address a whole range of issues from levels of executive pay, lack of diversity, the role of political lobbying and the poor quality of the financial information provided by auditors.

Legal & General (L&G) insists that it is not just posturing; the company voted against the re-election of nearly 4,000 directors in 2018 – an increase of 37% – including votes against over 100 board chairs on the basis of gender diversity alone.

‘engage with companies on a broad range of issues, using our voting power to influence change on behalf of our clients’

Speaking to the BBC, L&G’s director of corporate governance, Sacha Sadan, said it was getting tougher with company boards and managements: ‘2018 was a record year for us as we continued to engage with companies on a broad range of issues, using our voting power to influence change on behalf of our clients. The increased figures reflect the higher standards we expect companies to adhere to’

The sudden collapse of construction and services company Carillion caused widespread outrage at the standard of company stewardship in the UK as the company continued to pay out high salaries, shareholder dividends and got a clean bill of health from its auditor just months before it went into liquidation.

The business select committee of MPs recently reported that it was sceptical about asset managers’ appetite and ability to raise the quality of company management, saying: ‘We do not have confidence in institutional investors in exercising their stewardship functions. We cannot rely on shareholders to exert pressure.’

L&G itself admits that mistakes have been made in the past; in 2012, the company voted in favour of a remuneration package for the CEO of  chief executive of housebuilder Persimmon that saw Jeff Fairburn trouser £100m. ‘Since then we insist that maximum pay outs are capped,’ said Mr Sadan.

Fund managers have often claimed that they are trying to ‘reform from within’ whilst hoovering up bumper dividends from companies in the most controversial sectors, whereas their real power would come from selling their shares – or not become shareholders of misbehaving companies in the first place.

However, L&G insists that it is prepared to act responsibly and last year issued a list of eight companies whose shares they had decided to dump, including Russian oil company Rosneft, the China Construction Bank and Subaru.

The company says that the fact that all eight have tried to get themselves reinstated proves the power of shareholder disengagement; critics suggest that its argument would be more convincing if the list of black-balled investments included companies closer to home that would be more significantly affected by being spurned by the UK’s biggest asset manager, such as Royal Dutch Shell.

‘Large asset managers wield considerable power when it comes to telling companies how to behave’

Despite its dubious climate credentials, RDS is the UK’s biggest dividend payer, keeping investors sweet by returning 5.8% p.a.; L&G consoles itself by saying that it successfully ensured that the chief executive’s £17m (!) performance-related remuneration package was based on targets for safety and environmental improvements rather than raw profit.

Large asset managers wield considerable power when it comes to telling companies how to behave; however, they also have powerful customers of their own as increasing numbers of pension fund trustees are seeking assurances that their employees’ retirement contributions are not finding their way into embarrassing or inappropriate investments.

There was much spluttering when it was ‘discovered’ that The Church of England pension scheme was invested in payday lender Wonga; perhaps a more potent example is the decision of Norway’s sovereign wealth fund to divest itself of some of its fossil fuel investments – the very source of the money in the first place.

L&G’s statement is significant, and whilst it could take a long time to change behaviours, there does at least appear to be some recognition amongst savers and investors of their responsibilities; skilled asset managers should be able to ensure they put their investors’ money to good use whilst making a virtue out of it.