The biggest priorities for ESG investors this year

Investment managers are throwing their weight around as they meet with companies during AGM season.

It is the time of the year when investors hold companies to account during annual general meetings and push their environmental, social and governance (ESG) agenda.

Ethical investing has never been so important and many fund managers put it at the heart of their investment approach. They use their considerable voting clout to pressure company management to improve and attempt to block any policies that they disagree with.

We investigate the biggest themes for ESG investors as they set out their priorities for 2022, and look back at the last year of voting.

Executive pay

Pay awards are a big focus, particularly against the backdrop of the pandemic. Royal London Asset Management said it was working to ensure that pay is in line with financial performance. It is also looking closely at companies that have not paid back Covid relief but are choosing to grant substantial bonus payments.

Legal & General Investment Management (LGIM) is scrutinising companies that received support from the government or shareholders (via additional capital or suspended dividends) and made staff redundancies but continued to pay annual bonuses to directors.

Of the 137 remuneration report resolutions it opposed in the UK in the past year, 16% were due to concerns over bonus payments that appeared out of line with the stakeholder experience, while 26% were due to significant salary increases during the year.

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Board diversity

Ensuring that boards are diverse is a priority for fund groups. Over the last five years, Liontrust Asset Management has targeted 40 companies where board gender diversity was lacking. It said that 58% of these have improved to over 33% female representation.

LGIM opposed the election of 370 directors globally due to concerns about board diversity last year. It also undertook its second round of engagement with the largest UK and US companies to drive greater ethnic diversity on boards.

Of the 79 companies LGIM engaged in 2020, 50 added at least one ethnically diverse director between September 2020 and December 2021.  

Climate change

Climate change is one of the top topics for investment managers. AXA Investment Management has rolled out a “three strikes and you’re out” escalation approach to climate laggards, supplementing the extended oil and gas policy and tougher biodiversity engagement programme introduced in 2021. Climate change was AXA IM’s largest area of engagement last year.

BMO Global Asset Management also made climate change its single greatest engagement priority in 2021, as momentum around COP26 provided a critical window to press companies to align business strategy with a net-zero future.

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Action to address climate risk accounted for 23% of all engagement activity, while 22% of the 388 milestones achieved were linked to climate change.

Liontrust Asset Management said on average its funds emit 77% less carbon than the markets in which they invest and 22% have exposure to companies offering clean technology solutions.

Biodiversity

Protecting natural habitats is also a priority for investment managers. BMO has developed a voting policy focusing on companies with high exposure to biodiversity impacts but lacking adequate disclosure as part of its efforts to encourage greater transparency and accountability on biodiversity risk.

It also joined the Investor Policy Dialogue on Deforestation, which focuses on sovereign engagement in Brazil and Indonesia.

Ahead of the UN Biodiversity Conference this spring, it signed a letter calling for an ambitious global framework on biodiversity, as well as letters to both EU and UK authorities, urging agricultural policies to be designed to restore biodiversity and address climate change.

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At COP26 last year, LGIM joined 30 financial institutions with a combined assets under management of $8.7 trillion (£7 trillion) in committing to strive to eliminate agricultural-commodity-driven deforestation, with a focus on palm oil, soy, beef, pulp and paper, from its investment portfolios by 2025.

It said this was a critical step in reversing deforestation, reducing biodiversity loss, supporting food security, and aligning agriculture with a Paris Agreement-compliant 1.5°C pathway.