Fund groups are in a prime position to make serious change for good on behalf of not only their investors but also the planet. The rise of environmental, social and governance (ESG) investing in recent years has highlighted this point.
Stewardship involves asset managers engaging with companies they invest in on behalf of their clients in the hope of raising standards.
Amelia Tan, head of responsible investing strategy at LGIM, said it also helps to mitigate systemic risks in clients’ portfolios.
There are two ways groups can get involved with such decisions: by working with a company, or by forcing change. This is the difference between the carrot and the stick. Below she highlights examples of both.
Industrial & Commercial Bank of China is one of China’s largest commercial banks which LGIM holds a tiny” ownership in (the Chinese government is the majority owner). Yet even here, in an unlikely place, Tan said it is still possible to apply stewardship.
She said: “We assessed the company based on our climate impact pledge and found that it had clearly lagged; it had no thermal coal policy and lacked of scope 3 emissions disclosure.
“Given how influential it is in the market, we have tried to engage with the company multiple times over two years.”
LGIM first tried to use “direct engagement” and sent several emails to ICBC’s investor relations email address but did not get any response.
It then moved on to collaborative engagement and worked with peers to approach ICBC to get a meeting with the company.
Tan said: “Given the lack of responsiveness and of any real discernible progress on climate, we decided to place it on our climate impact pledge divestment list. We emailed that same investor relations address to inform it that we had publicly disclosed that we have divested from the stock in our portfolios.
“Within 36 hours, we were sent an email asking to meet the most senior members of our team. ICBC wanted to talk to us and I think that was the start of a great journey.”
Since then, ICBC has made ESG-relevant amendments to the Articles of Association, established an ESG committee and specified risk as a key director responsibility.
Tan said: “Improvements still need to be made in terms of their scope 3 emission disclosure to enforce a thermal policy, which is fairly difficult in China. We remain hopeful that in the next few years, or at least soon, we can name and fame them. That's the carrot.”
Between September 2021 and September 2022, ICBC’s ESG score from the firm rose from 40 to 52.
Tan added that the ICBC case addresses three points: how to prove that your engagement brought changes, how to influence a company if you don’t have own much of it and how to demonstrate what you are trying to achieve in terms of engagement.
On the other end of the spectrum is Capricorn Energy, a Scottish upstream energy company that LGIM was comfortable taking a position in from a climate transition perspective.
Tan said: “It had a lot of cash and as investors, we were looking for it to deploy that. Unfortunately, the firm announced a deal with Tullow Oil, which was quite different from what we were expecting.
“It concerned us. Valuations didn’t stack up, it was a heavy debt burden company, we were unsure about the cultural fit and, from a climate transition perspective, it didn't make sense to move on with this deal.”
A hedge fund launched an activist campaign to remove the entire board of directors and LGIM decided to back it.
Tan said: “Because we put our name behind that, it gained momentum and support from the rest of the industry.”
The company still has not held an emergency general meeting and scheduled the vote on the merger before the vote for directors. Tan called this modus operandi “unorthodox” and said it is a strong signal of governance failure.
She added: “We managed to get the chief executive (CEO) to resign and we have since then met the new CEO and chair. We understand that they are reviewing opportunities and will come back to us.”
Between September 2021 and September 2022, Capricorn Energy’s LGIM ESG score fell from 58 to 57. Those ESG scores aim to indicate to businesses where they stand with LGIM’s values. Last year LGIM filed three shareholder resolutions at annual general meetings.