Legal & General Group’s 2019 results show a massive surge in new business off the back of a mandate from the world’s largest pension scheme, Japan’s Government Pension Investment Fund (GPIF), a well-known advocate of ESG investing.
Inflows more than doubled at the UK’s largest asset manager, Legal & General Investment Management (LGIM), from £42.6bn in 2018 to £86.4bn last year – almost all coming from a £27bn passive mandate from GPIF.
GPIF has itself hit the headlines this week, speaking about the importance of long-termism and ESG at asset managers.
Nigel Wilson, Group Chief Executive of Legal & General, told RI that a lot of LGIM’s inflows last year were the result of the firm’s leadership position on ESG.
“It’s the ‘E’ [environment] and ‘G’ [governance] that interests Japan,” he said. “Also China is showing interest [in ESG] and, increasingly, America.”
Overall, Wilson credits L&G Group’s strong performance – operating profit up 12% to £2.1bn – on ESG, saying an increased focus on sustainability, net zero carbon and investment across the UK, played to its strengths.
“I’m not sure when the point of inflection happened, whether it’s a combination of David Attenborough, Extinction Rebellion and Greta Thunberg, but there is certainly the feeling that we have to get better at addressing climate change issues and decarbonisation and making much more positive steps and stop just forming committees.”
He continued: “The direction of travel is really good but the pace is too slow. We need to speed up. We’re certainly seeing that in the data around our business. The time to act is now.”
Climate change-focused products make up a tiny part of LGIM’s overall £1trn assets under management, but the £5bn Future World Funds have taken strong action on climate laggards, axing Exxon and others for failing to meet expectations on climate risk.
We need more doers, because we have had the talkers.
Its Climate Impact Pledge, launched in 2016, sees it engaging and publishing a list of climate leaders and laggards. In 2018 it supported more key US resolutions on climate change than any of the world’s 10 largest asset managers, according to the Climate 50/50 Project. And LGIM votes against chairs where companies lag on climate risk.
As well as being an early leader on climate action, Legal & General has for some time been thinking about “inclusive capitalism” – an idea which shot to the forefront last year after the Business Roundtable’s “stakeholder capitalism” pledge.
Wilson himself penned a series of blogs on the issue in 2016/17, highlighting issues such as financial inclusion and the rise in inequality in richer countries. He also spoke to intergenerational unfairness that meant “fewer people have capital or a real stake in the capitalist system… a puzzle for government, business and society that is in desperate need of solving”.
“The answer to this crisis of UK capitalism is more, not less, capital,” he said.
L&G’s activity in the space secured it a reputation as the UK’s largest impact investor, having committed £22bn to affordable housing, homes for the homeless, clean energy and other ‘impact’ investments in past years.
Its leadership position in pension risk transfer deals has helped it build a £60bn annuity fund, giving it the freedom to do more “interesting investments”.
Wilson has also spoken in the past about pension scheme savers being able to allocate more of the money to impact, or in line with their beliefs. L&G is trying novel innovations in this respect, such as a £4.6bn pension risk transfer with Rolls Royce in which Oxford University postgraduate engineers live and work in facilities part-funded by the pensions of their Rolls Royce predecessors.
Wilson says France is a leader here. “They do it where 20% of your pension allocation can often go into social impact investing. There are a lot of ideas we can just borrow from other parts of the world. The French have done better on this than we have and it hurts me to say that.”
L&G is exploring different ideas such as advocating with policy makers for 5% of defined contribution pension schemes to be allocated to venture capital.
Wilson has in the past worked with the UK government on impact-related issues. In 2016 he headed up a government mission-led business review seeking to catalyse more businesses committed to a positive societal impact.
Reflecting on today’s government, Wilson says: “I think the levelling up programme that the government is putting together [a plan to devolve power out of London] is very positive. We think there are going to be changes in the pensions arrangements in the UK which will give people a wider choice of assets to invest in, making it similar to what rich people can invest in.
“We think the infrastructure bank is going to happen, and that will invest in areas where the private sector hasn’t, like Teeside, which is urgently in need of capital. A lot of the coastal cities have done amazing jobs turning themselves around with the help of offshore wind. We think there are more opportunities like that in the UK, which link to themes around climate change.”
There are a lot of ideas we can just borrow from other parts of the world. The French have done better on this than we have and it hurts me to say that.
Last week, Wilson attended the UN climate summit finance agenda, a high-level conference in London to engage the financial community in the run up to COP26.
He says there are two lenses through which the finance sector can help tackle the climate crisis: “There is the voting lens to get companies to address issues themselves, and then there is the investment side”.
“There is a role for public policy here too. How we address investment in hydrogen, in carbon capture, the decommissioning of North Sea Oil, electric vehicle manufacturing, electric vehicle point charging, the EPC rating of houses and how to make them net zero.
“These are really big issues that finance can support. That’s what we’ve been talking about for years with inclusive capitalism. It’s how to align the economics and the social impact.”
To drive the agenda, Wilson says improvements in metrics and disclosure is needed, along with risk management and getting out of assets that are going to end up being ‘stranded’.
“But another part of it is about the positive opportunities and what you need to put new money into. We’re busy on all those fronts really.”
UN Climate Envoy and outgoing Bank of England Governor Mark Carney launched the “private finance strategy” at last week’s events, and Wilson praises his leadership: “It’s been really helpful we’ve got Mark Carney – someone to influence the influential. He is just the perfect person to get a massive commitment to climate change. He had one of the most important jobs in the world at the Bank of England. And he’s smart and personable.
“He and David Attenborough were a fantastic double act at the launch,” he adds.
“It’s not just about setting up the committees. We need more doers, because we have had the talkers. The evidence that David Attenborough and others produce is compelling and emotional, and now we have the rational financiers too, to drive through the necessary capital that’s required to make these good things happen.
“Which is lucky. As I’d hate to be competing for a mandate with David Attenborough.”