LGIM renews pressure on companies to provide climate accountability and achieve net-zero emissions
- LGIM to divest from four companies for failing to respond satisfactorily to engagement efforts; a further nine companies remain on the exclusion list
- Expanded engagement on climate issues shows positive results, with 22% of companies on LGIM’s priority list now setting a net-zero target
- During the 2021 proxy season, 130 companies are currently subject to voting sanctions for not meeting LGIM’s minimum climate-change standards
Legal & General Investment Management (LGIM), one of the world’s largest asset managers, has today released its annual Climate Impact Pledge report, revealing that it will divest from four new companies, due to insufficient action to address the risks posed by climate change.
Launched in 2018, this is the first Climate Impact Pledge report under LGIM’s strengthened approach announced last year, which saw LGIM commit to expanding its engagement to 1,000 global companies in 15 climate-critical sectors, that are responsible for more than half of greenhouse-gas emissions from listed companies. Companies falling short of LGIM’s minimum standards will be subject to voting sanctions, as well as potential divestment from LGIM funds with £58 billion in assets, including funds in the Future World fund range, and all auto-enrolment default funds in L&G Workplace Pensions and the L&G MasterTrust.
This year, LGIM will divest its holdings in Industrial and Commercial Bank of China, AIG, PPL Corporation and China Mengniu Dairy for unsatisfactory responses to engagement and/or breaches of ‘red lines’ around coal involvement, carbon disclosures or deforestation. These companies are in addition to China Construction Bank, MetLife, Japan Post, KEPCO, ExxonMobil, Rosneft, Sysco, Hormel and Loblaw, all of whom remain on LGIM’s existing exclusion list and who have yet to take the substantive actions required to warrant re-instatement.
LGIM is pleased to announce that US food retailer, Kroger, previously on its exclusion list, will be reinstated in relevant funds following improvements in its deforestation policies and disclosure, as well as efforts to promote plant-based products which have a lower climate impact. It joins companies such as automaker Subaru and oil major Occidental Petroleum, that have been reinstated in previous years.
Heightened engagement to drive progress
LGIM announced last year that under its expanded approach it would pursue a programme of deeper engagement with 58 companies that are influential in their sectors, but are yet to embrace the transition to net-zero carbon emissions. LGIM has been encouraged by the progress made over the past year, with almost three-quarters responding to its engagement campaign and 13 of the 58 companies now having a net-zero target in place.
Following its decision to make climate ratings for c. 1000 large companies publicly available under a ‘traffic light’ system, LGIM has further expanded its voting sanctions for companies that do not meet minimum standards, such as having board members with responsibility for climate issues, comprehensive carbon disclosures and greenhouse gas reduction programmes. During the 2021 proxy season, LGIM has subjected 130 companies to voting sanctions, with the banking, insurance, real estate and technology and telecoms sectors the most highly sanctioned through a vote.
Michelle Scrimgeour, Chief Executive Officer, Legal & General Investment Management and co-chair of the UK Government’s COP26 Business Leaders Group, commented: “Climate change is one of the most critical sustainability issues we face and we fully support efforts to align the global financial system with a pathway well below 2°C. We have made a strong commitment to push forward this agenda across the different parts of the investment chain, from our engagement with companies and policymakers through to our own investment process and LGIM’s own commitment to net zero. Participating in forums like the COP26 Business Leaders Group, ahead of the pivotal climate conference in Glasgow later this year, has emphasised the necessity of coordinated action to address climate risk and steer society towards a sustainable future. Progress cannot be made by acting in isolation and we, as investors, have a real role to play in the responsible allocation of capital and acting as stewards to our investee companies to encourage greater progress to meet our overall sustainability goals.”
“In the past year I have seen multiple ways in which we at LGIM are tackling the climate change challenge – coming together in forums such as this, as well as the Net Zero Asset Managers Alliance launched in December, the Sustainable Finance initiative launched by HRH Prince Charles and most recently the Glasgow Financial Alliance for Net Zero.”
Yasmine Svan, Senior Sustainability Analyst at LGIM commented: “Improvements in data and analytics have allowed us to increase our coverage and to enforce what we consider to be minimum standards with regards to climate risk management, through expanded voting sanctions, supplemented by our in-depth engagement with pivotal sectors. At the same time, as investors step up their scrutiny of companies, so too are companies raising their ambitions. We are pleased to be able to add to the number of companies reinstated in our funds following progress and will continue our engagement and collaboration to help increase overall standards across markets.”
Since LGIM launched the Climate Impact Pledge, it has seen positive progress in its overall climate ratings across markets and sectors. Since 2020, ratings for Asian companies have now overtaken North America in their average ratings, with the largest relative increase coming from emerging markets. However, less than a fifth of Asia Pacific companies and a third of North American companies fully meet the minimum climate standards enforced by LGIM.
The rankings have also revealed contrasting approaches by sector, with utilities and autos scoring the highest. In contrast, the steel, mining and aviation sectors saw the least improvements over the engagement period. Whilst full compliance with LGIM’s minimum climate standards is rare, even in the sectors which are most advanced along the low-carbon transition, the net zero momentum has gathered pace, with the overall number of companies setting net-zero targets almost doubled since October 2020.
| This article is based on information provided by LGIM.
| investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics. All opinions expressed are those of the author or contributing source.
The leaders and laggards
Key sectors and companies in focus for LGIM include:
- Utilities continuing to have the highest score, reflecting the relentless progress of scaling up renewables and phasing out thermal coal.
- Automakers have made notable progress, with Ford and Honda announcing net-zero 2050 targets, while General Motors has committed to carbon neutrality 2040. However, momentum on net zero across the sector must be matched by more widespread disclosure of Scope 3 emissions reporting.
- The mining sector is accelerating the transition towards transition-enabling metals and minerals and the shift away from fossil fuels.
- Banks and insurance – following more than three years of dedicated engagement by LGIM, JPMorgan Chase & Co announced plans to align its financing of three sectors with the goals of the Paris Agreement.
- In the oil and gas sector, BP has now strengthened its criteria around capital expenditures, with higher hurdle rates and carbon prices, as part of a strategy towards net zero which includes substantive cuts to production.
- Food retail – continues to be a laggard sector, with several food companies not meeting expectations around minimum standards on shifting away from high-impact products and decarbonising agricultural supply chains.
- In the shipping sector, regulatory forces are the shifting the focus on reducing emissions, with the International Maritime Organisation’s 2030 and 2050 targets widely adopted by companies. NYK has set science-based targets and engaging its value chain on low-emission solutions.
- Real Estate Investment Trusts (REITs) – Approaches to climate risk, and net zero in particular, vary across subsectors and regions, with companies focused on office buildings performing better than other specialty REITs, and European companies leading the sector. The varied data points and responses to LGIM’s ‘red line’ on emissions reductions reflects an industry quickly moving up the climate curve.
- Cement engagement has focused on Chinese companies, given the country is the world’s largest cement maker. Cement companies’ lack of response to investor engagement is alarming given how critical this sector and market is to global decarbonisation efforts.
- Chemicals sector – Norwegian company Yara has set a net-zero target and invested in green ammonia, which may be a critical technology to decarbonise shipping and other industrial processes. However, other companies in the sector will need to step up their efforts to avoid future sanctions.
- Aviation sector – is further behind decarbonisation than others, due to some extent to a lack of alternative fuels and the challenges brought by the pandemic. Following engagement, Southwest Airlines announced a net-zero by 2050 target.
- Apparel – a polarised level of ambition on climate management within the sector, with large gaps between the leaders and the laggards. It is notable that there is a geographical split, with European and Japanese companies further ahead than their American peers among the group targeted for engagement.
Key Risk Warnings
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