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Legal & General Investment Management (Holdings)

PRI reporting framework 2018

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

New selection options have been added to this indicator. Please review your prefilled responses carefully.

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
99 %
Percentage of active listed equity to which the strategy is applied
1 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

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.

Direct engagement

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.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

 

  • The active equity team is able to integrate consideration of ESG issues into fundamental analysis through exchange of information, use of the ESG scoring tool which is the starting point of our bottom-up ESG integration process, drawing an an ESG qualitative assessment framework that has been developed over the last year. Through this fundamental analysis stock recommendations, and subsequently investment decisions, are made.
  • In a world characterised by a changing climate, companies are increasingly exposed to regulatory, transitional and physical risks. Our Future World approach seeks to address these challenges, applying thematic investment analysis to capture the return opportunities and manage risks of a changing world while maintaining a responsible investment philosophy. Over the course of 2018 we will launch a number of FW funds which each have their own explicit ESG objective.

  • From 2018, LGIM’s Controversial Weapons policy will be applied across active fixed income and equity funds, certain index funds and client-specific portfolios. Upon client request, LGIM can screen for violators of the UN Global Compact.

  • Active dialogue with companies allows LGIM to learn more about its strategy, finances, risks and opportunities. Through engagement, we may be able to influence outcomes to better protect and enhance clients’ investments.


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

02.2. Provide a brief description of the ESG information used, highlighting any different sources of information across your ESG incorporation strategies.

LGIM undertakes its own internal ESG research. This is supplemented by ESG information from third parties

  • Raw ESG data: LGIM's proprietary tool enables us to score company performance against a range of ESG indicators across seventeen sectors. The indicators and weightings selected vary by sectors, according to materiality and draws on ESG data from: Bloomberg, Sustainalytics, Reprisk, ISS, Maplecroft, MSCI, and our own historical voting. The Climate Impact Pledge is our proprietary scoring framework, assessing companies on climate governance and contribution to the low-carbon transition. It draws on carbon emissions intensity, green revenue generation and other data points from Bloomberg, Sustainalytics, CDP and company reports.
     
  • Company-level ESG analysis: ESG team will do their own research, and may refer to ESG research providers to clarify details of interest. This in-house ESG analysis is shared with active equity analysts who go on to conduct further research. Sell-side analysis can serve as background information and news monitoring; used directly by active equity analysts and the ESG team.
     
  • Research from our long-term Thematic Working Groups is increasingly embedded into active teams' investment process.
     
  • ESG information is gathered from active engagement and face-to-face meetings with issuers. ESG team & investment teams often meet companies/issuers together.

 

02.3. Indicate if you incentivise brokers to provide ESG research.

02.4. Describe how you incentivise brokers.

Following the introduction of the MiFID II regime, LGIM pays for all sell-side research from their own P&L, including ESG oriented research.

As part of these regulations we carefully asses and pay appropriately for all useful, relevant and helpful research.

We can no longer accept any research which we do not rate.

We additionally incentivise brokers to provide ESG research in the following ways:

  • we complete some of the major broker evaluation surveys, such as Extel, as well as individual broker surveys
  • we provide informal feedback to brokers on their research and suggest areas that may be of particular value to do more in-depth studies

02.5. Additional information.[Optional]


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate if your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

Engagement with companies is a fundamental aspect of LGIM’s responsible investment commitment and a key way by which we seek to manage ESG risks and opportunities. Where discussion is not sensitive, joint engagement meetings with the corporate governance and active equity teams are frequently held with companies.

We have developed sector-specific qualitative questions for corporate governance, active equity and active fixed income analysts to consider as part of their fundamental analysis. These questions may also be put to companies.

Relevant and non-sensitive information derived from ESG engagement is shared with investment teams, via joint active equity and corporate governance bi-weekly meetings. Equity analysts and fund managers communicate with Corporate Governance informally on a regular basis, via an internal Bloomberg portal, dedicated to ESG but shared alongside all other equity/credit research, and email.

Voting decisions are shared with equity fund managers when appropriate and not-sensitive, through bi-weekly joint Corporate Governance/Active Equity team meetings.

The Corporate Governance team is uniquely positioned as an independent team, driving voting and engagement in the interests of all clients and managing potential conflicts. Parallel, equity teams may move forward relevant engagement topics as per their direct dialogue with management, and feed back to Corporate Covernance.


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

In 2018 LGIM has put in place a Controversial Weapons Policy, under which Legal & General Investment Management (Holdings) Limited (‘LGIM(H)’) and its subsidiaries will now exclude from its investments those companies involved in the manufacture and production of cluster munitions, antipersonnel landmines, and biological and chemical weapons. This policy will be applied to all active equity and fixed income funds.

Screened by

Description

Where requested by clients, we are able to screen companies for violation of UN Global Compact principles. We are also in the process of looking into a broader exclusion policy on UN Global Compact, as part of LGIM’s Future World strategy.

04.2. Describe how the screening criteria are established, how often the criteria are reviewed and how you notify clients and/or beneficiaries when changes are made.

Controversial weapons exclusions

  • Through the implementation of this Controversial Weapons Policy, Legal & General Investment Management (Holdings) Limited (‘LGIM(H)’) and its subsidiaries will now exclude from its investments companies involved in the manufacture and production of cluster munitions, antipersonnel landmines, and biological and chemical weapons
  • The screening criteria have been developed in-house by our Corporate Governance and Responsible Investment team.
  • We contract a third-party data provider to provide the research and data on company-specific involvement.
  • The screening criteria of our policy are reviewed on an annual basis, while the exclusion list is reviewed on a semi-annual basis
  • We will publish any changes to our policy on our website
  • The policy applies to active fixed income and equity funds – not index funds - and therefore we do not individually notify clients of changes made.

Further details of the policy can be found here: http://documentlibrary.lgim.com/documentlibrary/library_55458.html

UN Global compact exclusions

Where requested by clients, we are able to screen companies for violation of UN Global Compact principles. LGIM sources third-party information and analysis on companies that are in violation of UN Global Compact Principles. We are also in the process of looking into a broader exclusion policy on UN Global Compact, as part of LGIM’s Future World strategy

 


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

Note that in addition to screening, the active equity team aims to work with management teams and encourage and support change. We believe this is a much more effective way to build an ESG mind-set. Our aim is that ESG and mainstream investing merge and in the mid-term, all investing is executed with this mind-set.

Dialogue with companies is a fundamental aspect of our stewardship commitment. We focus on material issues that are pertinent to the specific company and engagement strategies are regularly reviewed to ensure we are effective in achieving the desired outcomes.

These engagement may lead to further action and disclosures by companies which can be in a variety of forms to improve ESG performance. For example, engagement might have led to the prevention of a poor remuneration policy being put to a shareholder vote or better reporting on climate strategy.

These outcomes are then recorded on a bespoke data management system (Salesforce) to ensure that there is a clear audit trail of the successful engagement process. Therefore, the determinants of the outcomes are specific to the company and dependent on the ESG issues facing the company.


LEI 06. Processes to ensure fund criteria are not breached (Private)


(C) Implementation: Integration of ESG issues

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate which ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

E,S&G factors are all systematically researched as part of fundamental investment analysis. ESG criteria forms part of the evaluation of equity investment risks&opportunities. The relevance and impact of each will vary depending on company, industry sector and geographical footprint, as well as the type of instrument and intended holding period. As such, integration of ESG criteria in the investment process is based on consolidated views of the relevance of these criteria at country, sector and issuer level, with judgement of its implications left to the portfolio manager.

LGIM's ESG proprietary scoring tool is used as a starting point to assess ESG risks across the investment universe. To objectively assess ESG performance relative to sector peers, it incorporates external data and analysis from six different sources. Each ESG category is broken down into relevant subcategories, each weighted according to potential to impact company performance. The overall score for a company's ESG performance is an aggregation of the weighted scores for each subcategory

The score supplements fundamental analysis, analysts use the score as a flagging mechanism to highlight areas of ESG risk and performance that may need further investigation. The score is available on the equity analysts and PMs' Bloomberg platform.


LEI 09. Processes to ensure integration is based on robust analysis (Private)


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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