Legal & General Investment Management (LGIM) has over £233 billion of assets under its management (as at 31 December 2006). LGIM is a major investor in the UK stock market and holds close to 4% of the share capital of companies in the FTSE All Share Index.
LGIM is committed to a responsible approach to investment which includes a regular dialogue with the companies in which it invests. Our views are valued by many FTSE boards and we are frequently contacted to discuss proposed changes to strategy, board balance and remuneration. Where a company has been under-performing or where there are issues with the board, we would request a meeting with either the Chairman or Senior Independent Director to discuss the issues and offer advice. We apply the same environmental, social and governance (ESG) policy to both our active and passive funds, and we report on our ESG activity to our clients on a quarterly basis.
It has been our policy to support the Association of British Insurers’ (ABI) Disclosure Guidelines, which call on companies to disclose that the business risks arising from environmental, social and governance matters are assessed and managed. During 2006 we continued to support these guidelines when researching companies whose disclosure was rated by the ABI as being ‘limited’.
In 2006 we extended our coverage of companies from those in the high impact sectors to all sectors, as a shift in the attitudes to ESG risks by the boards of these companies has led to an increase in the level of disclosure in recent years. This upward shift has been verified by the latest research produced by the ABI, which shows a fall in the number of companies rated as having ‘no’ or ‘limited’ disclosure and a rise in those regarded as having ‘moderate’ or ‘full’ disclosure.
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The ABI’s analysis suggests that the main reason for companies failing to achieve full disclosure is the lack of performance data showing how they have complied with their policies. The analysis made special mention of the Utilities sector for being the first sector whose constituents have all received a ‘full’ disclosure rating.
Since the ABI first introduced its disclosure guidelines, there has been a significant shift in the attitudes of companies and governments in recognising the importance of CSR. The boards of major companies are doing more to protect and enhance their reputation by undertaking initiatives to reduce the social and environmental impacts of their business, and the UK Government has introduced the EU Accounts Modernisation Directive and revised the UK Companies Act to encourage further disclosure and transparency. These shifts in attitude and understanding of CSR, together with the new reporting requirements, led to the ABI revising its 2001 guidelines and Legal & General, along with other institutions, was involved in this process. The new guidelines are not substantially different, but rather reinforce the requirements under new legislation for companies to include ESG risks as part of the overall risks facing the Company, produce a forward looking perspective and describe the actions the Board has taken to mitigate these risks.
In 2006, our Corporate Governance and SRI team was strengthened by the recruitment of a third full-time team member. In 2007 we intend to continue with our existing policy and further develop our framework for engaging with companies on specific issues such as climate change, waste, and social exclusion and poverty.
In 2006, we met the management of 18 companies specifically to discuss CSR issues and wrote to a further ten whose disclosure was rated as ‘limited’ by the ABI.
As noted above, it has been our policy to concentrate on companies whose disclosure is poor or where ineffective risk controls have resulted in the loss of value for shareholders. Although it’s important to concentrate on companies with poor disclosure or poor performance, we continue to maintain a regular dialogue with well established industry leaders.
In 2007 we intend to focus our efforts on a number of specific issues, in particular:
The impact of climate change is at the forefront of the minds of governments, industry and investors who see this as a major risk to the long term sustainability of our planet, and the issue will have major ramifications for many industries.
Many companies are implementing measures to reduce their carbon footprint and some, such as British Sky Broadcasting, have announced they have become carbon neutral. Many of the energy companies we met last year indicated that a lack of direction and incentives provided by governments was hindering progress. Scottish Power stated that it found the timeframe for obtaining planning permission has played its part in stemming the development of green energy. Governments are left grappling between the need to preserve the natural countryside and habitats for many species with the need to find alternative sources of energy that reduce the emission of carbon. Legal & General believes that, even without Government direction or subsidy, industry has its own part to play in ensuring their businesses remain sustainable. We intend to continue raising these issues with companies.
The depletion of suitable sites for use as landfill is a major concern for governments across the globe, and UK companies have been criticised for dumping hazardous waste illegally in Asia. A European Union initiative intended to stem the amount of waste sent to landfill sites led to the formation of the (Waste from Electrical and Electronic Equipment) WEEE Directive. The UK has delayed the implementation of this directive but it is expected to come into force in July 2007. The Directive requires all manufacturers and producers to take responsibility for the disposal of the products they sell at the end of their lifecycles. They will be responsible not only for the collection of their products but will also have targets imposed for reuse, recycling and recovery under ten broad categories. Legal & General will be assessing what measures these companies have taken to meet the demands of the new legislation.
ESG Policy can be found at: ESG Policy - 184kb PDF
The ESG policy was last updated on 15 February 2007.
Legal & General also operates an Ethical UK Equity Index Fund and Ethical Global Equity Index Fund, as well as an Ethical Trust.
