Legg Mason is a global asset manager, managing over AUD$1.1 trillion globally across equities, fixed income, alternatives and multi-asset strategies. Corporate engagement is a major pillar of Legg Mason’s responsible investment strategy, and the company’s specialist investment manager Martin Currie is an active equity specialist, crafting high-conviction portfolios for client-focused solutions. Investment excellence is at the heart of their business. Central to this philosophy is a stock-driven approach, based on in-depth fundamental research, active ownership of companies and skilled portfolio construction.
A signatory to the United Nations Principles for Responsible Investment (UNPRI) since 2009, Martin Currie has been awarded the highest possible A+ rating from the PRI across the ‘strategy and governance’, ‘incorporation’ and ‘active ownership’ categories since 2017.
RIAA hears from David Sheasby, Head of Stewardship & ESG, on Martin Currie’s insights on the future of engagement and its own approach to staying on top of critical issues.
With stewardship as a key focus of Martin Currie, what defines your own approach to stewardship?
Stewardship is, and has always been, a critical element of our investment philosophy at Martin Currie. Ultimately, this is because we believe that ESG factors can create risks and opportunities for investors.
However, another key important aspect of stewardship is about how we work with our clients, how we partner with them, delivering the outcomes that they’re looking for to create long-term, sustainable value.
Furthermore, it’s about how we behave as a business, how we run our own business in a responsible manner. We are guided by our mission statement of ‘Investing to Improve Lives’ in this aspect.
How is COVID-19 impacting your approach to ESG integration and responsible investing?
In response to the pandemic, we have not specifically needed to change our process or expand our engagement. Our sustainability and ESG related work are already fully integrated into every stage of our investment process and is a key priority of our investors.
However, interestingly, one thing that we are finding is that with the social distancing and reduced travel occurring worldwide, there has been an increased availability and willingness from management and boards of our investee companies to engage with us on broader ESG issues than ever before. This has been really encouraging during the COVID-19 period and we hope that it continues.
What have been some of the key issues or areas you have been focusing on as an organisation in your stewardship and engagement activities in the recent year?
We continually work to evolve and improve our ESG approach and the toolkit available for our investment teams.
For example, some of thing things we have been working on include our ongoing work to refine our proprietary ESG scoring, which comprises of two key elements – governance and sustainability. The former consistently scales board quality, management quality, remuneration, capital allocation and culture; the latter forms comparative assessments of the extent to which companies integrate material sustainability factors into their business models and strategies. This helps our investors to consistently measure the way a company approaches ESG, identify potential risks, and inform our engagement work.
Added to this has been an increased focus on scenario analysis to manage climate-related risk and opportunities as part of the transition to a lower carbon economy. We have also been developing a proprietary carbon sensitivity model which allows us to simulate the cost impact of carbon on a company’s earnings and market cap to better understand the future impact of climate and energy policy changes on companies and portfolios.
Furthermore, we are undergoing work to map company products and activities to the specific targets that underpin the 17 UN Sustainable Development Goals (SDGs). We are looking at the extent that companies in the private sector are able to contribute solutions to some of these issues.
How do you ensure you’re creating an impact with your stewardship work?
We know that stewardship is critically important for our clients globally and integral to this is how we report back to them on the outcomes of the stewardship and ESG activities that we are undertaking on their behalf. Across our investment team, we undertake very extensive engagement and voting activity, and in 2019 alone, our investment team engaged with ~200 companies globally on 400+ ESG issues, and we have provided our clients with details of material engagements and their outcomes as part of our standard reporting.
Importantly, a key part of our engagement activities is how we get to these positive ESG outcomes. We aim to develop strong ongoing relationships with investee companies. By doing this we are able to encourage greater transparency, ask more insightful questions and ultimately, gain greater insight into the company’s governance and their management of key ESG issues, and nudge companies towards real change. By helping to guide our investee companies towards more sustainable business practices, this then leads to long-term value for our clients.
Are you seeing a shift in focus, or prioritisation, in the way leading responsible investors are engaging and/or voting?
During this COVID-19 period we are seeing from clients a much higher level of intensity around their ESG focus, and more scrutiny from clients on hard evidence to support ESG statements. They are being more proactive than ever before and we see that continuing post the pandemic.
Although the COVID-19 pandemic shifted the focus for our clients somewhat, we have observed that climate change has continued to be the dominant theme across the ESG universe. Clients want to understand how we are approaching climate change on their behalf, how we identify the risks, how we identify those potential opportunities. We are receiving an increasing number of requests for portfolio carbon footprints, ESG questionnaires that include climate change questions as well as client requests for modified portfolio’s that exclude high fossil fuel producing companies.
For the year ahead, how will corporate engagement develop and or change as we move into the recovery phase from COVID? What will be the important issues that you believe responsible investors will need to pay attention to and embed in their engagements?
On top of my comments above, within climate change, we expect a continued focus on decarbonisation and the transition to a lower carbon economy. Cyber security and data privacy are also becoming key topics as the world becomes more digitalised. These are all areas where investors will become increasingly focused to make sure that that practice meets their expectations.
Another thing that I think will be accelerated by the impact of COVID-19 is an increasing focus from clients on the ‘Social’ part of the ESG spectrum. We see this particularly around the theme of how companies approach and look after their key asset – their workforce, and how they focus on human rights issues, such as modern slavery within their supply chains. This is particularly pertinent with the new modern slavery legislation coming into practice in Australia.
