corporate governance effectiveness

Investment managers have a pivotal role to play in fighting climate change: by using their influence through discussions, guidance and voting to ensure that corporate decisions take ESG (environmental, social and governance) factors into account, investment managers can help the world’s biggest companies lead the way to a low-carbon economy.

But how can you tell if your investment manager’s corporate engagement is effective, or if they’re just turning up for the biscuits?

Guy Opperman MP, Minister for Pensions and Financial Inclusion, has suggested three questions that we think could help asset owners better understand their investment managers’ engagement activities.

1. How often does your investment manager vote against company resolutions?

Voting for or against company resolutions is a fundamental way for us as investment managers to send a clear message to the company about whether their behaviours and intentions meet our required standards. Voting is an important tool for improving the effectiveness of engagement: by communicating what they expect of the companies in which they invest and why, investment managers can directly improve ESG standards.

2. Do they propose their own shareholder resolutions?

Putting forward a shareholder proposal is one way to ensure that sustainability is on the board agenda. It also galvanises support among shareholders for important issues and encourages open discussion to find effective solutions for problems that affect long-term shareholder value.

3. Do they support shareholder resolutions on climate change?

Independent research found that through the first eight months of 2019, the 10 largest asset managers in the world supported just 32% of ‘climate-critical’ resolutions in the US. This is surprisingly low, given the scale and urgency of the problems presented by climate change and what they mean for the long-term outlook of many businesses. Investment managers with a true long-term focus should be using their votes to support climate change measures that mitigate risks for companies’ futures and help them transition to a low-carbon economy.

Effective corporate engagement not only helps companies improve their ESG standards, but also gives investment managers a valuable insight into the challenges and opportunities faced by businesses and industries. For asset owners, clarifying your ESG expectations and understanding what your investment managers are doing to meet these is essential for encouraging positive ESG behaviours, driving industry change and mitigating long-term, climate-change-related investment risks.

How does LGIM fare? To put us to the test, visit our Active Ownership page for more information.