Legal & General Investment Management (LGIM) has axed Exxon and four other climate laggards from its Future World Funds range, while readmitting two that were excluded last year but have since stepped up to the investor’s expectations.
It is the second year of LGIM pursuing “engagement with consequences” for large companies which are failing to meet minimum standards on addressing climate risk in site of investor engagement efforts.
“Engagement can be a powerful tool if it is consequential.”
Under its 2016 Climate Impact Pledge, LGIM scores companies in the oil and gas, mining, electric utilities, auto, food retail and financial sectors on their approach to climate risk. Leaders are “named and famed” while laggards are divested from its Future World Funds, voted against and “named and shamed”.
LGIM has over £1trn in assets under management and the Future World Funds range represents £5bn of that.
Occidental Petroleum and Dominion Energy have been reinstated after exclusion last year on the back of what LGIM has called “positive outcomes”.
Occidental committed to Taskforce on Climate-related Financial Disclosures (TCFD) scenario analysis, began disclosing emissions produced from the use of its products, and is expected to announce emissions reductions targets for its own operations by the end of 2019.
Dominion, meanwhile, adopted methane reduction targets, improved carbon emissions disclosure and established a sustainability committee with board oversight.
The investment manager said its efforts had revealed a “false binary” between engagement and divestment, and that “engagement had really begun with divestment” in some cases.
Meryam Omi, Head of Sustainability and Responsible Investment Strategy at LGIM, said: “Our Climate Impact Pledge showcases that engagement can be a powerful tool if it is consequential. Talks without action are no longer fit for purpose given the urgency to address climate change.”The five companies that will be newly divested and voted against are Exxon, Hormel Foods, Korean Electric Power Corporation, Kroger and Metlife – the US insurer whose former CEO/Chairman Steven Kandarian sits on the Exxon board.
Exxon has not agreed to disclosing Scope 3 emissions or setting targets for its own emissions – two minimum standards under LGIM’s pledge. Omi said: “We’ve engaged, but we found the progress wasn’t meaningful at this stage.”
The food sector, which accounts for a quarter of total global emissions, was the most heavily represented sector in the exclusions.
Omi said: “In general, standards [in the food sector] are low. They’re not talking about emissions throughout the supply chain, and there are problems with traceability – they don’t know how the food gets to their operations. We need policies that are a lot more robust.”
Omi put forward Danone and General Mills as examples of food sector leaders, which have both set comprehensive emissions reductions targets throughout the value chain.
Each company’s score is calculated based on indicators including lobbying activities, targets, business strategy, and governance structure.
The pledge covers more than 80 companies which represent approximately half of the market capitalisation of six key sectors.
This year’s excluded firms join China Construction Bank, Rosneft Oil, Japan Post Holdings, Subaru, Loblaw and Sysco Corporation, which were divested last year and have yet to be reinstated.
LGIM said it has “successfully engaged” with all eight companies, but not all have taken substantive actions to warrant reinstatement.
There are 14 funds in the Future World range, including index funds, whose mandates allow for divestment up to a tracking error of 30 basis points, or 0.3%.
Omi said: “We’re trying to show to our clients: this is the toolbox that we have available in managing your assets.”
“We are enormously encouraged by the progress made by many of the companies. Companies at the bottom are catching up, while leaders continue to break new ground. But we know much more is needed, and will continue to push companies to build business models fit for a prosperous, sustainable future.”