Page 34 - DIY Investor Magazine - May 2019
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 As Extinction Rebellion climate change activists are arrested for blocking roads in central London a stark warning has been sent that the world is facing a climate catastrophe and businesses around the world must address it urgently or face the ultimate sanction of shareholders withdrawing their support.
However, the message was not issued by an environmental action group but from Legal & General Investment Management (L&G), the UK’s largest money manager, with £1 trillion of pension fund investments.
Climate topped a list of concerns about the way businesses are run, but the giant is determined to wield its power to address a whole range of issues from levels of executive pay, lack of diversity, political lobbying and poor quality financial information provided by auditors.
L&G insists it is not posturing, saying the company voted against the re-election of nearly 4,000 directors in 2018, 100 board chairs on the basis of gender diversity alone; Director of Corporate Governance, Sacha Sadan, said it was getting tougher with company boards and managements: ‘2018 was a record year for us as we continued to engage with companies on a broad range of issues, using our voting power to influence change on behalf of our clients.
The increased figures reflect the higher standards
we expect companies to adhere to’ The liquidation of construction and services company Carillion caused widespread outrage at the standard of company stewardship in the UK; it paid high salaries, shareholder dividends and got a clean bill of health from auditors right up to its collapse.
The business select committee of MPs recently voiced scepticism about asset managers’ appetite to raise
the quality of company management, saying: ‘We
do not have confidence in institutional investors in exercising their stewardship functions. We cannot rely on shareholders to exert pressure.’
L&G admits past mistakes such as voting in favour of
a remuneration package for the CEO of housebuilder Persimmon that saw Jeff Fairburn trouser £100m, saying: ‘Since then we insist that maximum pay outs are capped.’Fund managers often claim to be trying to ‘reform from within’ whilst taking bumper dividends from
companies in the most controversial sectors; real power comes from selling up or not investing in the first place. However, L&G insists it is prepared to act responsibly and last year issued a list of eight companies whose shares they had dumped, including Russian oil company Rosneft and the China Construction Bank.
All eight tried to get themselves reinstated which L&G claims proves the power of ‘shareholder disengagement’; critics suggest that its argument would be more convincing if it black-balled companies closer to home that would be more significantly affected such as Royal Dutch Shell which despite its dubious climate credentials keeps investors sweet by returning 5.8% p.a.
Asset managers wield considerable power in telling companies how to behave, but also have powerful customers of their own; pension fund trustees seek assurance that their employees’ contributions will not find their way into embarrassing or inappropriate investments – such as the Church of England pension scheme ‘discovering’ it was invested on payday lender Wonga.
L&G may be on to something - Norway’s sovereign wealth fund – the largest in the world – recently announced it is to divest itself of its fossil fuel investments; the very source of much of the money in the first place.
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