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ESG roundup: Axa IM, LGIM, GMI Ratings, MSCI

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  • ESG roundup: Axa IM, LGIM, GMI Ratings, MSCI

GLOBAL - UK firms perform least well on board and remuneration when scored for environmental, social and governance (ESG) performance, according to a white paper by Axa Investment Managers (Axa IM).

The paper, entitled 'Piloting ESG integration', is the result of an ongoing multi-year pilot effort by Axa IM to embed ESG factors into its equity investment and active stewardship practices, which include the development of a scoring process for key ESG metrics.

The paper found that 'cheap' companies with the best scores on board effectiveness returned 40%, whereas 'cheap' companies with the worst scores around board effectiveness returned -0.3% on an annualised basis.

I also found that issues concerning employee health, safety and turnover could impact shareholder value.

In the oil, gas and mining sectors, companies with the best current employee scores returned 21% on an annualised basis, whereas the worst returned 3%.

The paper concluded that for asset owners, ESG integration may soon reach a tipping point - "there is good reason to think ESG considerations will become a regular component of investment decision-making in the future".

The paper, which includes quotes from UK pension funds such as the London Pensions Fund Authority, Strathclyde Pension Fund and NEST on their attitudes to ESG policies, can be found here.

In other UK news, Legal & General Investment Management (LGIM) has said that pay proposals should be linked to delivering better long-term value for shareholders.

According to the asset manager, at a time when austerity and restraint are prevalent throughout the UK, large pay rises are inappropriate when not linked to performance.

Nearly 250 companies held their AGMs between April and May, which provided the ideal outlet for this sentiment and the opportunity for momentum to build, it said.

The result was the shareholder spring.

Sacha Sadan, director of corporate governance at LGIM, said: "The shareholder spring was perhaps the best example of how shareholders can help end contentious pay awards.

"Behind the headlines, however, there was already a growing number of companies willing to actively engage with their shareholders prior to AGMs. This meant the actual number of 'no' votes reduced. In fact, a little over half of the companies we spoke to about remuneration altered their pay proposals before their AGM."

LGIM has seen many companies taking positive steps over the past year.

An increasing number of companies are working with their shareholders to deliver pay packages, supported both internally and by shareholders linked to the business strategy.

Sadan added: "Being a responsible major shareholder means being active. Voting rights must be utilised, with abstentions used in exceptional circumstances only.

"An equally powerful tool for shareholders is the annual re-election of directors. If needed, we can bring pressure to bear on individual directors, particularly those involved with remuneration committees."

ESG and accounting research provider GMI Ratings has found that a company is more likely to experience regulatory trouble, litigation and stock-price underperformance if it gives its chief executive a bonus when the company underperforms, if the board is dominated by a tight group of friends who all have related party transactions with the company or if it seems to be in the habit of capitalising lots of expenses, year after year.

Speaking at a seminar on using non-traditional risk metrics to avoid 'black swan' events in London, Bob Monks, co-founder of GMI Ratings, said: "Among the causes of the 2008 financial crisis were appalling weak board oversight of systemically important companies, as well as irresponsible executive compensation practices that should never have been tolerated by the owners of those companies.

"All too many institutional investors, however, continue to bracket governance, along with social and environmental matters, as non-financial and the entire economy is paying the price."

Lastly, MSCI is to expand its ESG research coverage to include fixed income.

Its new fixed income offering includes ratings, scores, profiles and reports, available via monthly data feed and BarraOne.

In May, MSCI announced a partnership with Barclays to create a family of co-branded ESG fixed income indices.

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