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Legal & General Investment Management (Holdings)

PRI reporting framework 2018

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Process for engagements run internally

LEA 03. Process for identifying and prioritising engagement activities

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

03.1. Indicate whether your organisation has a formal process for identifying and prioritising engagement activities carried out by internal staff.

03.2. Describe the criteria used to identify and prioritise engagement activities carried out by internal staff.

other description

          Flags from LGIM's proprietary ESG tool, media report, link with theme or policy.

03.3. Additional information. [Optional]

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.

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
  • Identified as one of the 84 globally 'most systemically important' companies included in LGIM's Climate Impact Pledge
  • 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
  • voting issues
  • media report

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.

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.

LEA 04. Objectives for engagement activities

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

04.1. Indicate if you define specific objectives for your engagement activities.

04.2. Indicate if you monitor the actions that companies take during and following your engagements activities carried out by internal staff.

04.3. Indicate if you do any of the following to monitor and evaluate the progress of your engagement activities carried out by internal staff.

04.4. Additional information. [Optional]

As mentioned in question 01.4, our engagement activity is a combination of proactive and planned engagement and more reactive engagement.

The corporate governance team sets long-term strategic engagement targets which we use to plan and prioritise engagement and define engagement strategic objectives. Note that we have recently reviewed our long-term targets, taking into account LGIM’s five year strategy set out in 2017.

For 2017, we publicly disclosed the following annual objectives in relation to the five year strategic plan:

  • Engage with 84 companies as part of Climate Impact Pledge.
  • Engage with governments and companies to promote more disclosure on pay ratios
  • Engage with US companies on gender diversity
  • Formally invite external stakeholders to roundtables to strengthen our Corporate Governance and Sustainability policies

Clear and specific objectives are set at the start of each engagement and reviewed throughout the engagement process. Note that some of these objectives are disclosed publicly in advance of the engagement activity, for example under LGIM’s Climate Impact Pledge.

Tracking engagement activities

LGIM uses Salesforce, a bespoke data management system, to support the team’s engagement work. This system is used for our reporting purposes and to allow management to oversee the progress of engagement activities.

Monitoring progress and identification of need for escalation

The corporate governance team regularly monitors companies against the objectives set at the start of the engagement process to identify change. Actions taken by companies are monitored through direct communications by companies, media reports, regular exchange of information with investment teams, analysis of resolutions prior to a shareholder meeting. Another efficient way for LGIM to monitor companies objectively is to use LGIM’s ESG proprietary tool which collects external data and analysis from 6 different external third party sources and assesses and scores companies based on this data.

Internal Risk Management System – auditing of engagement

There is a clear audit trail of the engagement process, which enables us to report and communicate effectively on our activity both internally to the Corporate Governance Committee or investment teams and externally to our clients.

LGIM has its own internal Risk Management System (RMS) to provide effective oversight of key processes. This includes LGIM’s voting and engagement activities and related client reporting. If an item is not confirmed as completed on RMS, the issue is escalated to line managers and senior directors within the organisation.

Example of how we have monitored and evaluated progress in a  particular engagement:

During 2015 and 2016, we have engaged privately with a company on their succession plans at the board and executive level. The company’s chairman, who LGIM supported, had been in the role since 2010. Additionally the company’s Chief Executive Officer (CEO) who had been in this role since 2011 indicated his wish to step down in due course.

LGIM engaged proactively with the company during 18 months. All meetings and information discussed at these meetings was saved in our data management platform.

We worked in collaboration with and regularly updated our investment teams throughout the process.

The company later announced the current chairman would be departing in 2017 and confirmed the name of the successor. The company also confirmed the succession plan for the CEO position. This engagement was saved as a ‘success’ on our platform


Process for engagements conducted via collaborations

LEA 05. Process for identifying and prioritising collaborative engagement

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

05.1. Indicate whether your organisation has a formal process for identifying and prioritising collaborative engagements

05.2. Describe the criteria used to identify and prioritise collaborative engagements.

05.3. Additional information [Optional]

Pooling of assets with other investors can provide benefits resulting from the large size and scale of the group. We believe the most efficient and effective way of achieving mutual goals on voting and engagement is to speak with one voice. LGIM also uses its voting rights in relation to our collaborative initiatives, as we do for our direct and private engagements. 

Collaboration with other investors is done by the team both formally and informally. A formal collaboration can be initiated through organisations (more details in section LEA 07), and rather more informal collaboration process can take place through the teams’ extensive network of investors and other stakeholders where a common issue is raised.

LGIM utilises collaboration in three different ways to achieve its goals:

Firstly, collaboration is used as an additional tool in LGIMs escalation process to effect change in companies where we have not seen progress through other means. It allows us to raise our concerns about specific companies, topics and approaches with other investors. Raising such issues as a collective voice and demonstrating concern from a significant proportion of the shareholder base is effective for driving change. 

Secondly, other investors and associations approach LGIM to request we lend our weight and scale, as a large global asset manager, by joining initiatives and coalitions on companies.  These are assessed against the team’s strategic priorities, engagement themes and materiality.  Such forums allow us to share resources efficiently and the corresponding collaboration enables us to monitor and influence a broad range of topics, issues and companies globally.  We contribute to the dialogue and aim to change corporate behaviour by applying collective pressure.

Finally, collaboration allows LGIM to bring about change in the market as a whole on thematic issues. Working with other like-minded global investors is important and essential for us to achieve our desired outcomes at a macro level.

Example: LGIM’s leading role on a collaborative engagement initiative on board independence in Japan.

We believe that board independence is an essential element of a well-functioning board. It ensures directors have an independent and trusted judgment and that board discussions remain diverse to ultimately help on building sustainable, long-term performance.

In 2014, we launched a collective engagement initiative with other institutional investors to push companies to have at least one third of their board consisting ofindependent board members.

Focused and consequential collaborative engagement has proven successful. Many companies introduced outside directors to bring them in line, or even exceed this target. However, believe that institutional investors still need to play their role and further encourage improvement of board independence levels of Japanese companies.

We have therefore launched a collaborative engagement initiative with two other UK investors and one US institutional investors which consists in  of coordinating our engagement activity to push for more independence on Japanese boards, including the coordinated use of our voting power for more impact.

We collectively wrote a letter in English and Japanese to the Presidents, Chairman and independent Directors of 32 companies. This initiative was publicised in the Nikkei Asian Review. LGIM also met with eight Japanese companies together with other investors in April to keep momentum going with direct engagement with Japanese boards.

Challenges still remain in the region as many companies need to improve the composition of their boards in terms of independence but also in terms of skills and experience. The role of investors, and in particular at local level, is crucial in changing the dynamic. We will continue our individual and collective engagement activity with Japanese companies going forward.

LEA 06. Objectives for engagement activities

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

06.1. Indicate if you define specific objectives for your engagement activities carried out collaboratively.

06.2. Indicate if you monitor the actions companies take during and following your collaborative engagements.

06.3. Indicate if you do any of the following to monitor and evaluate the progress of your collaborative engagement activities.

06.4. Additional information. [Optional]

Collaborative engagement may be initiated for a variety of reasons described above In question LEA 5.3.The corporate governance team makes sure clear and specific objectives are set at the start of each collaborative engagement and reviewed throughout the engagement process.

We actively participate and contribute to collaborative engagement activities whether we lead them or join them. As mentioned above, LGIM uses a data management system throughout the engagement process with companies which the corporate governance team updates every time key new information on engagement is received. This includes a ‘success’ functionality which enables us to flag successful engagements. By playing an active role in collaborative engagements we often receive updates directly from companies. Where this is not the case, we keep updated on progress of any collaborative engagement activity through contact with other members. For more details on how we record and keep track of our engagement meetings please refer to question LEA 10.2.

Progress on engagement activity is peer reviewed at weekly team meetings and monthly individual meetings with the Director of Corporate Governance or Head of Sustainability and Responsible Investment Strategy. The regular review process ensures engagement is progressing as expected or requires escalation. This is also a way for the team to share lessons learned from engagement. Where an engagement is unsuccessful, the team assesses the reasons and develops a new approach to engagement.

As mentioned in our answer to LEA 04.4 information gained from collaborative engagement is shared with investment teams as long as it is not sensitive, as per the process detailed in our answer.

Example of how we have monitored and evaluated progress in a  particular collaborative engagement:

We have consistently engaged with the company since 2012, raising a variety of issues including strategy, climate change reporting, board structure – including climate change expertise, governance and remuneration. However,  we identified a lack of progress as the engagement meetings with the company were not leading to changes. This was observed through regular analysis of the company ESG data (including company communication, ESG proprietary tool and third party data) in preparation of various engagement projects, both thematic and reactive.

We have most recently escalated our engagement on climate change and governance issues by collaborating with a small group of investors and asset owners. We set out our engagement objectives with the group. In light of international commitments under the COP21 Paris Agreement, investors need assurance that the business models of companies they invest in are robust and viable over the long term.

As part of this collaboration we discussed the various climate change shareholder proposals on the agenda for AGM in 2016, including the resolutions to acknowledge the imperative for a 2 degree limit and to report on the impacts on the business of a 2 degree scenario being met. We met in person and explained that we had publically committed to voting in favour of both proposals as we did not feel that the company’s current disclosures were sufficient. We also pressed the point that the language the company has used in relation to this issue has been overly negative, suggesting that the company is not in support of policies which are aligned to the global goals and ambitions.

We recorded two successes in our Salesforce platform at the beginning of 2017. Firstly that the company announced in January 2017 that it appointed a scientist to its board in response to concerns on climate change, which is something we pushed for years and also as part of our collaborative engagement. Secondly, that the company added to its website in December 2016 its commitment to the 2 degree scenario.

Similarly to 2016, in 2017 we pre-disclosed our voting intention on the 2 degree scenario resolution as we considered the resolution at such a high profile company to be very influential and were keen to illustrate its importance and our commitment to this critical issue.  We engaged with the company ahead of the 2017 AGM explaining our expectations on this resolution as well as other governance concerns such as the lack of access to company board members and specific environmental expertise on the board.  All our discussions with the company and various emails from the company or our group of investors were recorded in our data management system Salesforce.

In 2016 38% and in 2017 62% of shareholders supported the proposal requesting a report on impacts of a 2 degree scenario. The passing of the resolution in 2017 was significant as the first time this resolution has gained majority support.  We engaged with the company after the AGM explaining the detail of the report we expect to see and that their current reporting does not go far enough. The company subsequently issued a regulatory filing explaining that it would introduce enhancements to its reporting, including analysis of the impact of policies designed to limit the increase in global temperatures to 2 degrees. They followed with a report publication. This has now been recorded in our data management system Salesforce as a successful engagement. We will monitor implementation of these changes and shall give our feedback to the company.

Process for engagements conducted with/on your behalf by service providers

LEA 07. Role in engagement process

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

07.1. Indicate if you play a role in the engagement process that your service provider conducts on your behalf.

07.2. Indicate the role(s) you play in engagements that your service provider conducts on your behalf.

07.3. Additional information. [Optional]

Collective work is an extremely effective method of engagement, but one that requires enormous amounts of resources and organisation. In order to facilitate this process, we are members of industry-wide associations and networks.

As noted in 02.2, the 'Service Provider engagements' are not commercial relationships where they are mandated to engage with companies on our behalf (ESG overlay or consultancy type of arrangements). Instead, they refer specifically to cases where we use associations to develop standards and push for regulatory and market reforms.

Our membership to various investor associations, including Board positions, working groups and committees enable us to influence the strategic direction of collaborative engagements and inputting our views on strategy and content of the engagements.

Our participation at board level or committee level allows us  to monitor and oversee the activity of service providers. For service providers where we do not hold a board or committee level position,  we monitor and oversee their activities through direct communications from them, regular and active participation to conferences, and regular contact with their representatives.

Example of joint engagement with a service provider: Cobham plc

In April 2016, the company sought a £500m rights issue to reduce debt otherwise risked breaching its banking covenants. In addition, the company decided to still preserve its dividend payment even though it was raising capital to address financial stress.

This surprised the market (demonstrated by a 19% fall in the share price) and was widely criticised by investors. Trust and confidence in the board to manage financial risk was also severely damaged. We raised our concerns with regards to the company’s history of capital allocation, the deterioration in working capital management and free cash flow generation and the size of issuance including fees payable.

LGIM held a meeting directly with the company following the announcement. We had material concerns with the decision-making of the board and escalated our concerns to the UK Investor Forum. The Forum conducted in-depth discussions with several key shareholders in Cobham and agreed a collective engagement strategy that was communicated to the board in June 2016.

Investors involved in the engagement believed that in addition to the rights issue that was required to repair the company’s balance sheet, a succession plan was needed to hold the board accountable for past failures. Furthermore, the company needed to strengthen and refresh the skills and knowledge of the board in order to better prepare the business for future challenges.

The Forum was able to strengthen the voice of leading shareholders, and engaged with the board through the year. They reported to LGIM regularly throughout the process.

Many of the issues identified in the engagement strategy and shared with the Chairman in June came into sharp focus and were addressed with the profit warning that accompanied the trading statement in November.

By the end of 2016, the company had replaced its Chairman, CEO and CFO and the collective engagement was closed as investors await a new strategy and approach from the new team. LGIM felt this was a positive outcome and as a long term investor we continue to actively monitor the company.

LEA 08. Monitor / discuss service provider information

08.1. Do you monitor and review the outcomes of the engagement activities undertaken by your service providers on your behalf?

Please select all that apply

08.2. Additional information. [Optional]

As a long-term investor, we remain involved in the engagement activities of our service providers from the start to the end of any engagement activity we are involved in. We are therefore able to monitor progress of the engagement activity undertaken by our service providers on our behalf directly through direct participation to company meetings organised by our providers, and/or regular contact with our service providers.

General processes for all three groups of engagers

LEA 09. Share insights from engagements with internal/external managers

09.1. Indicate if insights gained from your engagements are shared with your internal or external investment managers.

Type of engagement

Insights shared

Individual/Internal staff engagements

Collaborative engagements

Service provider engagements

09.2. Additional information. [Optional]

Any information that is market sensitive is withheld andour structure ensures that conflicts of interest between corporate governance and fund management teams are managed. More information on our conflicts of interest policy is shown below:

Sharing information with internal investment managers

LGIM’s corporate governance and investment teams regularly exchange information and specific company insights regularly in the following ways:

  • Weekly: Corporate Governance team member joins the Active Fixed Income morning meeting and feeds back relevant engagement insights to the team. CG team member also emails the investment teams with any relevant insights from the weekly Corporate Governance team meeting, in which current engagements are discussed.
  • Bi-weekly: Cross-team meeting held between active equities, active fixed income and corporate governance. 
  • Monthly: Updates from LGIM’s thematic working groups (energy, technology, demographics) shared at the weekly and bi-weekly meeting. Monthly index and corporate governance joint meeting.
  • Ad-hoc: Company and sector specific relevant information is shared on an ad-hoc basis between investment teams and Corporate Governance teams, via an internal sharing portal on Bloomberg, or by email.

We share all key outcomes of our engagement meetings with our investment teams using the various processes described above.

Note that we are willing to share any meeting information with our investment teams as long as it is not market sensitive information.

Sharing information with external investment managers

We regularly collaborate with external investment managers on an ad-hoc basis where we think exchange of information would be mutually beneficial. Information shared with external investment managers is left at the discretion of members of the corporate governance team, without disclosing any market sensitive information.

Use of information shared by the corporate governance team

The corporate governance teams works actively with all investment teams at LGIM. Investment decision-makers adopt a different approach to the use of information gained by the corporate governance team in engagement meetings and depending on the asset class of their investments.

Active Equities:

Investment decisions are made on company fundamentals, growth momentum and valuations relative to comparable companies. While portfolio managers are ultimately responsible for decisions made regarding the portfolios, they draw on information and insights from other teams, including the LGIM-in-house macro team, the corporate governance team and the Global Trading Team.

Fixed income:

While the fund manager of the portfolio is ultimately responsible for all investment decisions made, including ESG factors, the fund manager makes his or her decisions by taking into consideration the views of the credit analysts and the wider fixed income team. The integration of ESG factors is done during fundamental analysis.

Index funds:

In the case of the Future World Fund, ESG factors helped construct the underlying index (carbon reserves and green revenues), to which the Climate Impact Pledge was added as a company engagement (and divestment) overlay.

The corporate governance team are working actively with the index investment teams on new solutions to further integrate ESG into index products

LEA 10. Tracking number of engagements

10.1. Indicate if you track the number of your engagement activities.

Type of engagement
Tracking engagements

Individual / Internal staff engagements

Collaborative engagements

Service provider engagements

10.2. Additional information. [OPTIONAL]

The corporate governance team keeps track of and monitors all individual and collaborative engagements with companies using Salesforce, a bespoke data management system.

The team logs all company interaction into our data management system. This includes company emails, meeting information such as date, time, attendees, themes discussed and any other issue or information they have on the company. The team also attaches meeting notes which help us monitor any commitment made by the company during a meeting. This helps us in holding management accountable in the case where a commitment does not result in action. In addition the system includes a ‘success’ functionality which enables us to flag successful engagements and their outcomes.

In the case of collaborative engagement with service providers, we follow the same process. However, as we may not necessarily participate directly to all company meetings depending on the engagement strategy in place, we are kept informed of the progress of the engagement by representatives of the service provider acting on our behalf.

Our data management system is updated with company information every time a member of the corporate governance team has a company meeting or receives company information they would like to keep a track of. The system is used dynamically by the team which means that it function is tailored to and evolves with the needs of the team in terms of processes and business activities.

We use all data collected to report to our clients quarterly on progress of our engagements in our ESG quarterly reports and annually to the public in our annual report. Data collected is tailored to our reporting needs and helps us measure the number of engagements per company, theme, region, and sector.

There is a clear audit trail of the engagement process. LGIM has its own internal Risk Management System (RMS) to provide effective oversight of key processes. This includes LGIM’s voting and engagement activities and related client reporting. If an item is not confirmed as completed on RMS, the issue is escalated to line managers and senior directors within the organisation. Note that LGIM has obtained an independent assurance opinion on our stewardship and voting processes, in line with the AAF01/06 framework.