By Meryam Omi, Head of Sustainability and Responsible Investment Strategy and Iancu Daramus, Senior Sustainability Analyst
We have made our engagement with companies critical to the energy transition deeper and wider, to help meet the vital goal of net zero carbon emissions.
The wildfires raging in California and Brazil have reminded us all that climate change is unfortunately immune to the pandemic. Indeed, 2020 is on course to be another of the hottest years on record.
But this is not a time for despair; we are witnessing growing momentum in support of climate action. Just within the past few weeks, we have seen China pledge to reach carbon neutrality by 2060, the EU Parliament vote in favour of stronger climate targets, and major banks on both sides of the Atlantic commit to cut the carbon in their portfolios.
To help accelerate this momentum, LGIM is ramping up the ambition of its Climate Impact Pledge engagement programme. We are leveraging new data sets and analytics, vastly increasing the sectors and companies covered, in a concerted push to drive more transparency in the market and help companies build resilient strategies. And, in keeping with our belief in ‘engagement with consequences’, we will systematically hold companies accountable through voting and investment sanctions.
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Taking stock
When we launched the pledge four years ago, we announced we would be assessing the climate strategies of 80 of the world’s largest companies in six sectors. Much has changed since then. As described in our newly published report, we have seen progress across sectors and countries. Notably, companies from which we had previously divested have stepped up following our engagement, leading to reinvestment.
Our work has been met with a positive response from clients, companies and the media, with LGIM being ranked #1 globally among asset managers for our approach to climate change; we have also been selected by the UN Principles for Responsible Investment among its ‘leaders group’ on climate. Yet we believe we can do more.
Forward, faster
Gone are the days of trawling through pages and pages of ‘corporate sustainability reports’ in the hope of finding anything that looked like a hard number. The recent explosion in the availability and quality of data now allows us to model and quantify some of the financial implications of different climate-change scenarios for companies.
We are now able to assess many more companies against data-driven standards. So as part of our updated process, we make climate ratings for about 1,000 companies publicly available under a ‘traffic light’ system.
These companies have been selected from 15 climate-critical sectors (from aviation to steel-making) and are responsible for some 60% of all greenhouse gas emissions from listed companies.
About 500 companies we have identified as having poor scores relative to their size will receive letters detailing our assessment. And, through voting, we will sanction companies that persistently fall short of our minimum standards at the 2021 AGM season. The stringency of our standards and sanctions will increase over time, with the possibility of divestment from select funds for persistent offenders.
Alongside this quantitatively driven engagement programme, we have also selected some 60 companies for in-depth engagement, in which sector experts from across LGIM’s investment teams will also participate. These companies are influential in their sectors, but not yet leaders on sustainability; we believe they can and should embrace the transition to net-zero carbon emissions in the next few years.
This hands-on engagement is founded on our sector-specific guidance, detailing the challenges and opportunities each sector faces in reaching net zero emissions, and the qualitative principles for our assessment in each sector.
If companies cross the ‘red lines’ we have set out in our sector guidance, engagement with these 60 companies may translate into firm-wide voting sanctions and divestment consequences for funds adopting the Climate Impact Pledge exclusions.
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Making your money matter
We have seen a growing number of clients interested in amplifying the voice and impact of their investments, by leveraging the scale of LGIM.
One clear example is the decision to adopt future pledge-related exclusions in LGIM’s DC default funds, including standard defaults for L&G Mastertrust and contract-based schemes, representing around 3.3 million members – over half of our member base.
This is a natural evolution from our research demonstrating the growing demand from members for pensions with a positive societal impact.
To bring global emissions to near zero in the next 30 years – which is increasingly recognised as the safest path to meet our collective climate goals – is a daunting task. But individuals can make a difference – not least through their choice of pensions and investments.
Through the pledge, we believe we can amplify our clients’ desire to help effect positive change at some of the world’s most powerful companies. Not only can it help raise global ambitions on how we tackle this era-defining challenge, but in our view it can also transform the very narrative of what is possible.
Source: LGIM
