Legal & General Investment Management (LGIM) is redoubling its engagement efforts with a revised Climate Impact Pledge that will expand the number of companies it holds to account that fall short of minimum standards.
The firm, which has £1.2trn in assets under management, initially published its Climate Impact Pledge in 2016, where it said it would engage with 80 of the largest companies in the energy, transport, food retail and financial sectors around the strength of their sustainability strategies.
However, LGIM said in a statement, as consensus has been growing around reaching net-zero carbon emissions globally by 2050 as the safest path to meet climate change goals, the firm has been able to expand this to over 1,000. With more than a ten-fold increase in number of companies covered, LGIM said the selected companies are responsible for over 60% of the greenhouse gas emissions from listed companies.
Meryam Omi, head of sustainability and responsible investment strategy at LGIM, and member of the COP26 finance high-level climate champions team, explained: “Inaction on climate change threatens the long-term stability of the market, but we know engagement with consequences can get companies to change. The challenge is having more speed and scale. That is why we are combining cutting-edge data with in-depth research into key sectors to support companies that are building resilient strategies, and systematically hold to account those that are not”.
LGIM is also updating the scoring methodology for its proprietary climate modelling system, which awards climate ratings in a ‘traffic light’ system.
In the report Renewing our Climate Impact Pledge the firm said previously the underlying methodology behind the climate ratings looked at 100 different indicators. In certain cases, the team was trying to assess these indicators qualitatively but this can now be more precisely measured with data. As a result, LGIM has “streamlined” the list of indicators to 40 including coverage of the following:
- Climate governance
- Disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD)
- Company policies and participation in relevant sector initiatives and standards
- Climate lobbying
- Climate value-at-risk and temperature alignment (drawing on LGIM’s climate modelling capabilities3) as well as green opportunities
- Historical and forward-looking carbon performance
If companies do not meet the minimum standards set out in the ‘traffic light’ system, LGIM can take action by voting against them “across the entire book” or divesting from some funds.
The report said: “But we will be holding many more companies systematically accountable: climate ratings for about 1,000 companies will be publicly available on our website, under a ‘traffic light’ system, alongside the methodology for their assessment. This represents a more than ten-fold increase in coverage under the pledge.
“Therefore, companies and their stakeholders will be able to verify their progress in a transparent process. In addition, we will encourage companies to provide feedback to our data providers, thereby improving the accuracy of climate data for the entire market.”
LGIM is also expanding the number of sectors covered to include cement, steel, chemicals, technology and telecoms, apparel, real estate, transport and food.
Net zero
LGIM also said it has upgraded its engagement model to focus on net-zero impacts and divided the engagement universe into two (broader engagement and deeper engagement), in recognition that all companies need to change but some have much further to go.
Broader engagement A more rules-based and data-driven approach, where about 500 companies with red ‘traffic lights’ (where LGIM has a large holding) will automatically receive a letter highlighting their rating and any potential sanctions.
Deeper engagement A more tailored, ‘hands-on’ approach, focused on about 50 companies, which are pivotal to the transition. For these companies, LGIM has developed a more in-depth assessment framework to understand their strategy, and we will engage in direct dialogue to help remove roadblocks and encourage progress.
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“In keeping with our constructive approach to engagement, for both groups we have given sector-specific guidance as to transition pathways and key milestones; technologies that require development; and policies that need to be implemented,” the report said.
“As we renew our Climate Impact Pledge, we will support efforts to achieve net-zero emissions by 2050 with energy and determination – through our engagements, voting, capital allocation and the way we partner with our clients. We are proud that our parent company, L&G Group, has set a strong example by pledging to align its business with the 1.5°C temperature goal of the Paris Agreement.
“In the years since we launched the pledge, we have seen that investor pressure can help steer companies towards sustainability. By making our climate engagement programme even more ambitious, we believe we can truly help transform the world. The goal of net zero is possible – and we are committed to achieving it.”
Progress in 2019
As well as detailing its future plans, LGIM also shared engagement examples from last year and progress made by sectors it has been engaging with. It noted “positive steps” taken by BHP and BP in adopting net zero targets and setting carbon goals for customers. LGIM co-led engagements with BP under the ClimateAction100+ investor coalition.
It also said utilities continuing to have the highest climate score, reflecting the “relentless progress of renewable energy” and “the charge to phase out coal”. This has been led by progressive European utilities such as Enel, LGIM said, and is now reverberating in markets that had previously resisted change, including some regulated utilities in the US and in South East Asia.
LGIM also noted automakers “rapid development” of electric vehicles, and banks and insurance companies were making “notable commitments” such as “Commonwealth Bank of Australia’s and Chubb’s vow to halt coal financing and Lloyds Banking Group’s plans to halve the carbon it finances over the next decade”.
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The only sector to decline year-on-year in the ratings was food. LGIM said food retail “remains a concern” as scores for greenhouse gases, governance and targets have declined. LGIM has been engaging with food companies on deforestation in supply chains and transition towards lower impact products. It added that Nestle has modelled the impact of a changing climate on its coffee, cereal and dairy production while General Mills added carbon-storing agriculture techniques to its supply chain.
The report added: “Since 2019, the scores under our original approach have increased across most sectors, while those for all sectors have improved since the start of our pledge. This trend is all the more notable given that we have raised some of our minimum standards as companies began to meet them.”
