Shareholder Rights Directive II (“SRD II”)
The Revised Shareholder Rights Directive (“SRD II”) came into force in the European Union on 10th June 2019 and in Ireland on 30th March 2020 and introduces new rules to further promote effective stewardship and long-term investment decision making.
SRD II imposes requirements on Legg Mason Investments (Ireland) Limited (the “Firm”) to develop and publicly disclose information on their engagement policies and investment strategies in relation to the shares of companies invested in that are admitted to trading on EEA regulated markets. Those subject to SRD II may either comply in full with the requirements or choose not to comply with some or all aspects, in which case they are required to explain their non-compliance.
As stated in the SRD II legislation, and acknowledged by the Firm, one of the reasons for the revised rules is that the greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies which includes environmental, social and governance (“ESG”) factors.? The Firm is a wholly owned subsidiary of Legg Mason, Inc. ("Legg Mason") a global asset management company. The most distinctive feature of Legg Mason is its specialised approach to managing money. It houses a selection of prestigious investment management businesses, each operating autonomously and focusing on a distinct segment of the market. The Firm has delegated investment management to some or all of these investment management businesses. Accordingly each investment management business pursues different strategies across different asset classes and markets across the globe.
As stated in the SRD II legislation, and as acknowledged by the Firm, one of the reasons for the revised rules is that the greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies which includes environmental, social and governance (“ESG”) factors.?
Information that SRD II states is to be included in a shareholder engagement policy covers how:
- Companies invested in are monitored on relevant matters such as:
- financial and non-financial performance and risk;
- capital structure;
- social and environmental impact; and
- corporate governance.
- Dialogue is conducted with companies invested in.
- Voting rights and other rights attached to shares are exercised.
- Other shareholders are co-operated with.
- Relevant stakeholders of the companies invested in are communicated with.
Actual and potential conflicts of interest in relation to its engagement are managed.? The actual approach and policies of the investment management businesses in relation to engagement with issuers and their management are therefore determined by each investment management business. For SRD II, subject to any requirements that must be complied with, each investment management business takes its own approach to engagement with issuers and their management in all of the jurisdictions in which it invests. The locations of the investment management businesses (some are based outside of the European Union), different approaches by individual? EU member states in implementing SRD II and the different? regulatory regimes that they each operate within? mean that that it is not possible for there to be a “one size fits all” SRD II or ESG approach.
As an example, one of the investment management businesses, Martin Currie (based in the United Kingdom) has for many years integrated ESG factors as part of the normal due diligence it performs as part of its fundamental research and analysis for identifying ideas for client portfolios.
Their particular emphasis on active ownership (engagement and proxy voting) provides the opportunity for Martin Currie to influence the behaviour of companies in which it invests. Martin Currie is also an active participant in long-term collaborative engagements with companies and other stakeholders.
Martin Currie also:
- Has been recognised for the high quality of its ESG integration into its investment process by being awarded the highest possible (A+) rating awarded by the Principles for Responsible Investment (across all three categories: strategy and governance, incorporation and active ownership).
- Worked collaboratively with the International Integrated Reporting Council and UK Financial Reporting Council.
- Has been recognised for its reporting on stewardship activities by the International Corporate Governance Network (ICGN)
Another of the investment management businesses, ClearBridge Investments (based in the United States of America) has for many years integrated ESG factors as part of the normal due diligence it performs as part of its fundamental research and analysis for generating recommendations for its stock selection process.?
- Has an internal ESG ratings process across its equity research platform. ESG ratings are proprietary scores intended to signal to investment teams how well a company has executed its ESG practices. This helps ClearBridge Investments to enable its clients to benefit from responsible, sustainable business and promote positive change through direct company engagement, proxy voting and raising awareness of ESG.
- Has an integrated approach to ESG investment provides an opportunity to interact with companies on these issues and equip leading-edge companies with the economic leverage to advance these issues across their entire value chain.?
In relation to annual engagement and voting record approaches vary and may be available on an investment management business’s website, through a client’s usual contact or otherwise on request.
Legg Mason’s mission statement for clients, shareholders and employees is “Investing to Improve Lives”. This starts with the effective stewardship of clients’ capital to achieve investment goals and also broader objectives. Aligning investment behaviour to create sustainable value over a long term horizon means Legg Mason is better attuned to effectively serving clients.