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Engagement – an important device in a fund manager's toolbox

Investment Analyst Dominic Rowles looks at how stakeholder engagement can create value for both companies and investors, and reviews Legal & General's approach.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Engagement is the means by which investors, shareholders and fund managers express opinions and influence companies’ decisions.

When you own a share in a company, you own a small part of a business. That means you get certain rights including having a say on how the company's run. You can attend shareholder meetings and vote on management's proposals, or if you can’t attend you can cast a proxy vote.

Fund managers often have greater stakes in companies. It means they can have a bigger say on a range of issues – from strategy and operational performance, to risk management and management’s pay. They can also influence companies to adopt better Environmental, Social and Governance (ESG) practices.

In this article, we look at the evidence behind stakeholder engagement and how Legal & General have successfully engaged with companies on issues like climate change and diversity.

This article is not personal advice. If unsure if an investment is suitable for you, please ask for advice. All investments fall as well as rise in value, so you could get back less than you invest.

The more, the merrier

The bigger a fund manager's stake, the more bargaining power they have. Some fund managers increase their bargaining power further by working with other fund managers and collectively negotiate with companies to achieve shared goals.

The Investor Forum is a UK group set up to help investors work together to achieve change. Last year, the Forum partnered with members to address concerns about transport operator First Group. It concentrated on issues such as the company's strategy, succession planning and the effectiveness of its Board.

Following engagement with investors, the company refreshed its Board and appointed a new Chair. This, combined with their commitment to address investors' concerns, reassured the Forum and its members.

Does engagement add value?

There's a growing amount of academic evidence that suggests engagement adds value.

One of the earliest studies in 2006 tried to establish a link between shareholder activism and performance. It looked at the first 41 investments made by the Hermes UK Focus Fund, between launch in October 1998 and December 2004.

According to the study, the fund managers achieved 65% of their engagement objectives. At the time, the fund had outperformed the broader UK stock market by an average of 4.9% a year. The study estimated that 90% of this outperformance could be put down to the managers' engagement outcomes.

Another study in 2015 looked at an anonymous fund manager's engagement record, covering more than 2000 engagements with over 600 US companies. It found that successful engagement was followed by positive financial returns in the majority of cases. On average, successful ESG-related engagement boosted returns by 7.1% in the following year.

Engagement in action – Legal & General

Legal & General is a global asset manager and looks after around £1.2trn of investors' money. When they speak, companies tend to listen and we like their commitment to encourage good ESG practices among the companies they invest in.

In 2019, Legal & General engaged with 493 companies on issues from climate change and diversity to managements pay and corporate strategy.

One of the most successful engagements was with global energy giant BP. Legal & General teamed up with other shareholders to submit a proposal calling on BP to outline its response to climate change. The company later announced a package of industry-leading carbon reduction targets.

Legal & General's Future World is a range of funds that incorporates their 'Climate Impact Pledge'. It's their commitment to assess and engage with some of the world's largest companies on how well they manage the implications of climate change.

Companies that consistently show a lack of awareness of climate change and engagement proves unsuccessful, are sold from the Future World funds. The exclusion list is reviewed on an ongoing basis, so excluded companies can re-join the fund if they improve.

We recently added the Legal & General Future World ESG Developed Index to our Wealth Shortlist. Alongside the exclusions under the Climate Impact Pledge, it increases investments in companies that score well on a variety of ESG criteria – from the level of carbon emissions generated, to the number of women on the board and the quality of disclosure on executive pay. It also reduces the allocation to companies that don’t score as well on these measures.

The fund does employ some negative screens on top of this, and won't invest in tobacco companies, pure coal producers, makers of controversial weapons or persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption).

Please note the fund has the flexibility to use derivatives which if used adds risk.

Read our latest full analysis on Legal & General Future World ESG Developed Index

See the fund factsheet for more on this fund, including charges

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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