At LGIM, we believe that well governed companies that manage all stakeholders, including the environment, are more likely to deliver sustainable long-term returns. We view the consideration of environmental, social and governance (ESG) issues as part of risk management, and therefore part of fiduciary duty. We recognise that companies are intrinsically linked to the economies (and societies) in which they operate and we therefore believe that investors have a responsibility to the market as a whole. Our ultimate goal is to protect and maximise the investment returns for the benefit of our clients' assets
In general, the integration of ESG-related criteria in the assessment of companies is not intended to result in any negative or exclusion lists. Rather, the motivation to incorporate ESG is the protection and enhancement of investment returns. We believe that systematic inclusion of ESG issues by analysts and portfolio managers helps identify areas related to the performance of companies that might have financial impact in the short, medium and long term. Similarly, if laxity on ESG matters is embedded in an organisation's culture it also is more at risk of lagging its peers in the marketplace.
The Active Equity Team has a fundamental approach to investment that lends itself to integrating ESG into the decision making process.
This is done using the following approach:
Industry level research
Fundamental analysis requires our equity teams to anticipate the impact of underlying market trends related to ESG, and to monitor evolving policy and legislation that could influence investments. The team draws on the expertise of both our in-house ESG team which monitors ESG industry impacts across both equity and fixed income, as well as sell-side research.
Long-term thematic research
In 2017 LGIM set up three long-term thematic working groups that undertake top-down research and analysis of macro-economic issues, related to responsible investment and ESG. The groups are made up of credit, equity, multi-asset and ESG professionals and were set up by our CIO at the start of 2017. The groups focus on three key ESG-related macro-economic trends by way of demographics, technology and energy. We believe that analysing the connections between these themes provides valuable and often unique insights into how companies are adapting to the challenges of a changing world - and a changing climate. We combine our research efforts across asset classes, allowing us to access information and expertise that, we believe, are not always used efficiently by other market participants. Thematic research is increasingly embedded into active teams’ investment processes.
On-going dialogue with companies is a fundamental aspect of LGIM's responsible investment commitment. The active equity team and corporate governance team regularly, when appropriate, meet companies together. This provides an important platform to raise ESG-related questions, and to put the answers in the context of the wider investment thesis. When meetings take place separately, and where relevant and appropriate, notes are shared between ESG and investment teams
On-going communication with investment teams
As mentioned above, while the team is independent of all investment professionals, on-going communication is maintained with investment teams, in order to share knowledge and information.
There is a daily exchange of e-mails, research, discussions, and telephone calls between the Corporate Governance team and the investment teams including active equities on a range of company, market and regulatory issues including sharing research sources and recommending pertinent research to one another. In addition the Corporate Governance team has access to all investment notes published by the active equity and fixed income teams via the internal Bloomberg network. LGIM’s ESG proprietary scores are made available to the investment teams via the internal Bloomberg network.
The corporate governance team also has formal bi-weekly meetings with the Active Equity and Active Fixed Income teams to share the information and knowledge that it has gained on specific companies. This is in addition to regular informal sharing of information.
The corporate governance team is structured so that the analysts have specialist ESG knowledge in specific sectors. This enables the analyst to have constructive conversations in-house with fund managers or with numerous companies in the same industry to discuss similar ESG topics. Our approach, which combines financial analysis and ESG, is continually evolving in line with best practice. We continue to formalise our processes and improve how we communicate and report our work to internal and external stakeholders.