Legal & General : LGIM increases pressure on companies to address climate risk, holding a far more extensive number of companies to account

14 Oct 2020

Legal & General Investment Management (LGIM), one of the world's largest asset managers, has today released its annual Climate Impact Pledge increasing the ambition of its engagement programme.

• LGIM's expanded and ambitious engagement programme seeks to spur net-zero carbon emissions globally by 2050
• Climate ratings for circa 1,000 companies will be publicly available - a tenfold increase in analysis and coverage, with voting and investment sanctions applied to 'laggard' companies

Using quantitative metrics, including LGIM's proprietary climate modelling[i], climate ratings for over 1,000 companies in key sectors will be publically available under a 'traffic light' system on LGIM's website. More than a ten-fold increase in number of companies covered, the selected companies are responsible for over 60% of the greenhouse gas emissions from listed companies.

Companies identified as falling short of LGIM's minimum standards - e.g. lacking comprehensive disclosure of emissions or key sustainability certifications - will be subject to a vote against and potential divestment from select funds. LGIM intends to 'ratchet up' the stringency of both its standards and sanctions over time. This announcement comes as independent analysis higlighted LGIM's strong voting stance, with LGIM being a top supporter of 'climate-critical' shareholder resolutions compared to the world's 12 largest asset managers[ii].

In 2016, LGIM committed to engage with around 80 of the largest companies in the energy, transport, food retail and financial sectors around the strength of their sustainability strategies. Companies demonstrating best practice were celebrated publicly, whilst LGIM voted against and divested poor climate performers - including ExxonMobil - from its Future World range of funds. The programme has contributed to positive steps taken by companies such as Dominion Energy, with LGIM announcing Japanese automaker Subaru - previously on its exclusion list - will now be reinstated in its Future World funds following improvements in emission targets and disclosures.

Since 2016, consensus has been growing around reaching net-zero carbon emissions globally by 2050 as the safest path to meet the goals of the Paris Agreement on climate change. The growing urgency has been met with significant improvements in the availability of climate data and analytics in the market. In light of these shifts, LGIM is now strengthening its Climate Impact Pledge through expanded coverage and focused company and policy engagement around the net zero challenge.

Commitment to transparency

LGIM's assessment companies on metrics ranging from overall governance through to emissions targets and companies' climate-related lobbying activities. Since 2019, the climate scores under LGIM's original approach have increased across most sectors, while the scores for all sectors have improved since the start of 2016.

LGIM notes positive steps taken in the extractive industries, by companies such as BHP and BP adopting net zero targets and setting carbon goals for their customers. LGIM has co-led engagements with BP under the ClimateAction100+ investor coalition.

Celebrating reformers, seven of the ten companies that have registered the largest improvements since 2019 had been previously named by LGIM as 'laggards', leading to reinvestment in some cases.

At a regional level, there has been overall progress in the average scores of most countries, with some of the highest year-on-year improvements in Australia, Japan and South Korea. In the US, LGIM finds the number of companies explicitly discussing climate risks and opportunities has grown, despite federal plans to withdraw from the Paris Agreement. However, LGIM's research also uncovered a significant divergence between the leaders and laggards, with sectors such as food retail declining year on year. The environmental impact of food and agriculture remains an area of concern for LGIM, who has recently engaged with the Brazilian government around Amazon deforestation[1].

Whilst welcoming the growing climate ambitions of investee companies, LGIM cautioned against 'greenwashing', noting an increase in their associated reputational risks, as measured by machine-learning-based metrics.

The announcement comes shortly after LGIM was selected by the UN Principles for Responsible Investment as part of its 'leaders group' on climate change[2].

[i] For more details on LGIM's climate modelling capabilities, please see: https://www.legalandgeneralgroup.com/media-centre/press-releases/lgim-announces-climate-solutions-capability-powered-by-risk-and-alignment-framework-co-developed-with-baringa-partners/

[ii] Majority Action, Climate in the Boardoom, How Asset Manager Voting Shaped Corporate Climate Action In 2020, available at https://static1.squarespace.com/static/

[1] https://www.bloomberg.com/news/articles/2020-07-09/after-snubbing-donations-for-amazon-brazil-hopes-they-ll-resume

[2] https://www.unpri.org/the-pri-leaders-group/4771.article

As governments around the world are set to announce new and ambitious climate policies ahead of next year's COP26 conference, investors must also step up. Through our engagement programme renewed to align with the net zero challenge, we want to help steer companies and our clients towards success in a low-carbon world.

Michelle Scrimgeour, Chief Executive Officer, Legal & General Investment Management and member of UK Government's COP26 Business Leaders Group

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.

Transparency is key - companies must be consistent in what they declare publicly and how they lobby governments behind the scenes. And investors must be transparent about how they assess companies. By making our climate ratings publicly available, we want to encourage companies to address gaps in their disclosures and strategies, whilst adding a layer of public accountability.

Meryam Omi, Head of Sustainability and Responsible Investment Strategy at LGIM, member of the COP26 High Level Champions Team

There is mounting evidence that firms that put sustainability at the heart of their strategy perform better, too. It is vital that asset managers like LGIM must continue to use their influence to accelerate the sustainability revolution across all sectors.

Lord Nicholas Stern, IG Patel Professor of Economics and Government at the London School of Economics (LSE) and Chair of the Grantham Research Institute on Climate Change and the Environment