Law Debenture Corporation | ESG

Law Debenture (‘the Company’) represents a unique proposition, a FTSE250 investment trust, with a material operating business (IPS). While the Company is governed holistically, with a set of central values and objectives, by its very nature, the operating business provides an additional opportunity to demonstrate our approach to ESG over and above most Investment Trusts.

The core principles underpinning a responsible approach to ESG are an intrinsic part of Law Debenture’s investment process, as detailed below.

It is crucial for us as Fund Managers to identify the key opportunities and risks for any companies either held in or under consideration for the portfolio. Our approach does not extend to the exclusion of specific sectors (such as fossil fuels); we address the reasons why in more detail below. It continues to be our view that engagement is more conducive to change than exclusion.

There are three core principles of incorporating environmental, social and governance factors into the Law Debenture investment process

1. Identifying investment opportunities. Within the portfolio we seek to identify companies with underappreciated opportunities for sustainable sales and earnings growth. The drivers of this sustainable growth could include environmental or societal factors; for example, the need to decarbonise the global economy is driving demand for alternative energy sources.
2. Identifying material risks. Identifying material ESG risks is an implicit part of the investment process. While identification of a material environmental, social or governance risk does not necessarily preclude ownership within the portfolio, it will be an important consideration when determining position size and appropriate valuation level. Companies which have material ESG risks identified should be actively seeking to address these issues and show evidence of progress; if no progress is evident, we would not own the company. Progress is monitored by use of both third-party data sources (such as Sustainalytics) as well as engagement with the company management team. Engagement will be led by either the Fund Managers or the experienced Janus Henderson Governance and Responsible Investment team.
3. Active engagement and upholding strong governance standards. We take our responsibilities as stewards of investors’ capital seriously and seek to engage with companies thoughtfully on executive remuneration, where possible always vote at AGMs, and encourage high standards of corporate governance (such as board diversity). Janus Henderson subscribes to independent proxy voting advisers. In situations where the adviser recommends voting against, the Governance and Responsible Investment team alongside the Fund Managers will assess whether they agree with the recommendation, with the final voting decision made by the Fund Managers. In our view a company’s board and senior executive remuneration policy needs to be appropriately struck relative to both its peers (on a domestic and global basis) and (increasingly) relative to its broader employee base. There needs to be a defensible logic to how corporate remuneration levels have been set.

Examples of applying each of the three core principles:

1. Identifying investment opportunities: Ilika (a producer of solid state batteries) – there is a need for non-flammable, faster charging and longer charge retention battery technology. Ilika is seeking to address this by developing and manufacturing solid state batteries for use across a range of applications (such as healthcare, industry and, over the long-term, electric vehicles). Their technology remains at an early stage of commercialisation, but the need for better battery technology driven by (in some cases) the transition away from fossil fuels means potential end markets are large. Ricardo (an environmental consultant) – as companies across a broad range of industries commit to achieving net zero, there is a need for a specialist consultant to help companies plan out and achieve these goals. Ricardo work across a range of industries including automobiles, the public sector, defence and utilities to help companies achieve their environmental goals. In our view the need to decarbonise the global economy will be a helpful tailwind to Ricardo’s sales and earnings growth.
2. Identifying material risks: Royal Dutch Shell and BP – both Royal Dutch Shell and BP continue to generate the majority of their earnings from fossil fuels. Therefore, as the world gradually transitions towards lower carbon energy sources there is a question mark surrounding durability of earnings and cash generation. In our view fossil fuels will form a necessary part of the energy transition, with renewable energy sources currently lacking the scale to wholly replace fossil fuels on a short- or medium-term time horizon. In this transition period, there continues to be a need for fossil fuels to provide the world’s energy requirements. These fossil fuel sales are providing Shell and BP with the cash generation to spend meaningful sums (in both absolute terms and as a proportion of their total capital expenditure) transitioning towards renewable energy. In our view the valuation of Royal Dutch Shell and BP (measured on metrics such as free cash flow generation), combined with their meaningful investment in renewable or lower carbon energy sources, means they merit a place in a portfolio.
3. Active engagement and upholding strong governance standards: Large UK industrial company – we recently held discussions with the Chairman of one of the industrial companies held. This followed a receipt by the CEO of an unsolicited, alternative opportunity; therefore, the Board and Remuneration Committee felt the need to respond to the offer. This response included increasing the CEO’s base salary to better reflect relevant peers. In our view the CEO had, during his tenure, improved the operational performance of the company materially, and we saw a clear and defensible logic to how the new remuneration levels had been reached, therefore we voted in favour of Directors’ Remuneration Report at the AGM.

Robust governance, transparency and accountability are embedded in our corporate values. Within our IPS business, utilities’ consumption and business travel are critical aspects of our environmental and carbon footprint. In 2020, we were pleased to move into a new ‘green’ office and adopt paperless ways of working and we look forward to increasing our focus on ESG in 2021.

We are proud that we have strong female representation across our Board (42% female) and Senior Management Team (50% female). We are working to ensure that ethnic diversity is appropriately represented within our organisation, but we acknowledge that there is more work to do.

Governance is what we do 

As a business providing governance services to our clients, the G in 'ESG' is the core of what we do. Law Debenture was founded 132 years ago to be a bond trustee. Our role as a bond trustee is to act, as an independent conduit, between the issuer of a bond and the bondholders themselves. For 50 years we have been offering pension trustee services, meaning we are instrumental to the governance of over £300bn of assets belonging to current and future pensioners. Our Corporate Services business includes over 50 colleagues performing company secretarial services, the very heart of governance. And our Whistleblowing business gives hundreds of companies and many thousands of employees a safe and confidential way raise issues to the highest levels.: 

Purpose values and community 

In 2021 we have launched a programme to define and articulate our company purpose and values. These are underpinned by the core value that we ‘do the right thing’ for our stakeholders – be they investors, clients, colleagues, beneficiaries or client staff using our whistleblowing service. Providing peace of mind as a foundation for our stakeholders’ success is the common thread which ran through all our businesses.  

We launched our values in June 2021 and over the coming year will work to embed these throughout the business, giving a clear message as to how we should behave with each other and our wider stakeholders. 

As part of the work around our culture, in 2021 we have launched a number of community groups, all of which are made up of a community of colleagues passionate about the issues considered. They are fully supported by the leadership team and we are working with them to embed educational and community programmes and activities which help to improve the positive impact LawDeb makes on society and its staff. The community groups are: Sustainability, LGBTQ+, BAME, Disability, Christian bible study, Charity, Mental Health and Wellbeing, Running, Open Water Swimming and a Book Club. All of these enhance our inclusivity and prove opportunities for diversity of thought.

In July 2021 we welcome two interns to the business through the charity Ambitions about Autism, as part of their Employ Autism programme.

Information on the Company’s approach to ESG can be found in the latest annual report.  

The Manager’s ESG Principles are available on its website.  

The Company’s appointed investment manager:

- supports the Stewardship Code

- is a signatory of the Principles for Responsible Investment