October 2020

Tackling the climate crisis

LGIM’s 2020 Climate Impact Pledge will use more detailed methodologies to hold even more companies to account

Climate change wind farm

In 2016, Legal & General Investment Management (LGIM) first set out the Climate Impact Pledge, a programme of targeted engagement with 80 companies to hasten the transition to a low-carbon economy. This year, we’re renewing it – and we’re being more ambitious.

We’ve recognised that to tackle the climate crisis we need to target more companies to help achieve net-zero carbon emissions globally by 2050. So we’ll be using newly available data, and holding even more companies globally to account, as well as more sectors, working with them to keep our planet, its ecosystems and its people safe.

The change so far

We believe what we’re doing is working – which is why we want to do more of it. Since our initial Climate Impact Pledge, not only did we vote against the chairs of company boards that failed to demonstrate sufficient action on climate change, but we named the companies we were voting against. So far, we have sanctioned 13 companies, including ExxonMobil, MetLife and China Construction Bank, to positive effect. We found that publicly naming these companies elevated our conversations with them, which motivated them to address our concerns. Since last year, seven of the 10 companies that have registered the largest improvements are those that we had named as ‘laggards’ in the past.

Climate scores are rising across all sectors, with the biggest cumulative increase between 2017 and 2020 in the utilities sector (28.6%), due in large part do the charge to phase out coal, followed by banks (26.9%). The sectors that have seen the smallest increase are insurance (3.4%) and food (6.1%).

Changing the future

These increases aren’t enough. To meet the net-zero challenge of our renewed Climate Impact Pledge, we are expanding the number of companies and sectors covered by the pledge, as well as updating our scoring methodology to 40 indicators, now that we can access more and better data.

We will continue to hold companies to account that we believe fall short of our standards by voting against them and divesting from their securities within some of our funds. The big change this year will be in the number of companies we’ll be holding to account. On our website we’ll be hosting a ‘traffic light’ system for 1,000 companies, scoring their green credentials, which means more companies and stakeholders will be able to verify their progress transparently.

Climate change is one of the biggest risks that investors are facing today, with $10 trillion of capital invested worldwide in the globally listed sectors.”

Sonja Laud,
Chief Investment Officer, LGIM

We will make a concerted effort to target and engage with sectors that are key to reducing global emissions from gas, oil, mining and transport, through to clothing, food manufacturing and financing. We have also divided what we call our ‘engagement universe’ in two: broader engagement and deeper engagement. About 500 ‘red traffic light’ companies will receive a letter from us highlighting their rating and potential sanctions. For the 50 companies that we believe to be pivotal to tackling the crisis, we will adopt a more tailored and hands-on approach, where we’ll work to understand their strategy and work to help remove roadblocks and encourage progress.

Harnessing data is key to this approach

There’s no doubt that harnessing data and utilising technology is critical in tackling this crisis. We’re already used to using data to assess companies’ environmental, social and governance credentials; now we’ve taken things a step further.

At LGIM, we are partnering with Baringa Partners to use their global Climate Change Scenario Model as the foundation of the bespoke climate risk framework that we have co-developed. The partnership leverages Baringa’s 20 years of experience in climate risk and transition, as well as XDI’s leading physical risk solution.  

Destination@Risk draws on this Climate Change Scenario model to measure the climate risk and climate alignment in investors’ portfolios. The framework has initially been used to analyse 2,000 companies around the world and has found that the majority are not aligned with the objectives set out as part of the Paris Agreement, which aims to limit the global temperature increase to 1.5°C by 2050. It also identified a number of sectors as having significant risk concentrations, confirming that climate presents a significant and material risk for long-term investors.

“Climate change is one of the biggest risks that investors are facing today, with $10 trillion of capital invested worldwide in the globally listed sectors. This is amongst the most vulnerable sector in investor portfolios when it comes to the energy transition required to meet the Paris Climate agreement by 2050,” explains Sonja Laud, Chief Investment Officer, LGIM.

Inaction on the climate catastrophe we all face is not an option. To tackle this looming crisis, the collective ‘we’ must act now. We are not naming to shame, we are naming to change. By making our climate change programme even more ambitious in the renewal of our Climate Impact Pledge, we truly believe we can work with other companies and their people to create a better tomorrow.

 

Source: LGIM Climate Impact Pledge, 14 October 2020