Proactive and reactive engagement
Our engagement activity is conducted using two complementary and interrelated approaches. Firstly, thematic engagement and secondly, company specific engagements. The majority of this work is proactive and planned over time; however there is also the need for reactive company engagements, e.g. following an M&A announcement.
The scale of our global asset exposure means we have a responsibility, and opportunity, to address long-term issues, evolving regulatory hurdles and shifting societal demands that will impact the value of our clients’ assets. Future risks are just as important as recent mistakes. This forms a key component on our engagement work and includes engaging with regulators and policy makers as well as individual companies.
Prioritising and identifying engagements
Client objectives sit at the heart of our engagement decision-making. When planning engagements we consider ESG issues that could affect the value of our clients’ assets, both directly and indirectly in the short to long term. Priorities for engagement are chosen mainly from the overall assets’ exposure, in terms of country, sector and companies. The companies where we have the biggest holdings pose the greatest risks and opportunities to market performance. At the same time, where we hold large stakes we have a stronger influence. Focusing on larger companies can have cascading impacts on other companies within the country and sector by setting standards and best practices. Additionally, we look to engage with ESG laggards, to protect the standards to which we see most companies abide.
Sitting behind this method of selection is a longer-term strategic planning process for engagements. We set a long term strategy amongst the team when we review our progress towards and approach to delivering on our mission and strategy, and plan and prioritise engagements accordingly.
Company engagements may also be triggered in other ways, such as voting issues, flags from LGIM's proprietary ESG scoring tool, or a media report. Illustrated below are the types of possible causes behind an engagement effort.
In 2017 we have been engaging on the following topics executive pay; gender diversity; climate change; cyber security; transparency and short-termism. However engagement is not limited to purely ESG items, but covers governance in its broadest sense looking at all material issues including regulation, listing rules, mergers and acquisitions, corporate strategy, and capital and financial management.
We are globally recognised for being a long-term, constructive, collaborative and informed investor; therefore companies from around the world actively seek out our opinion. We provide examples and case studies of our individual and collective engagements in our quarterly ESG Impact Reports and in our Annual Reports. Note that our 2017 Annual Report will be published in April 2017.
Engagement at board level
As a long-term shareholder, we aim to be trusted advisors to the management and boards of the companies in which our clients invest. We expect engagement conversations to involve high-level strategic discussions on matters that affect companies’ long-term financial returns. We therefore expect engagement to take place with the chair or independent lead non-executive director.
In addition, to encourage mutually beneficial engagement, we have published a thought piece, available on our website, to encourage dialogue between board directors and their investors. The thought piece explains why engagement is beneficial and sets out LGIM’s expectations on successful engagement with companies on a global scale.
Setting an engagement strategy
When deciding an engagement strategy we will consider our ability to influence to effect change and the approach required. Note that we have recently reviewed our engagement strategy to reflect the evolution of our asset base. We take into account the following non-exhaustive list of factors when deciding whether to engage with a company:
- link with theme or policy
- company market cap and LGIM’s holdings in the company
- controlling shareholder
- access to a company’s management
- score on our proprietary ESG tool
- previous interactions with a company
- general company insight
- the appropriateness of engaging individually or collaboratively with other investors or industry associations, public policy actors, sector specialists and regulators
- the need for further in-depth research to be undertaken or commissioned
- the timeframe and expected milestones of an engagement
- the ability to effect change
Clear objectives are set at the start of an engagement and reviewed throughout the engagement process. The topics of our focus are incorporated into the usual dialogue relating to items included in the annual or special meetings of shareholders, meetings, shareholder proposals.