Legal & General Investment Management (LGIM), one of the largest investors in Europe, looks set to vote against and divest more climate laggards over the next three years as it prepares to publish climate ratings for around 1,000 companies.
The move, announced today, represents more than a ten-fold increase in the number of companies covered by LGIM’s climate engagement programme, the Climate Impact Pledge, which now covers firms responsible for over 60% of emissions from listed equities.
First launched in 2016, the “engagement with consequences programme” has so far seen LGIM score 80 companies on their approach to climate risk – “naming and faming” leaders, while laggards have been divested from select funds or challenged via the ballot box at AGMs.
So far, 13 companies have been “sanctioned” as part of the programme, including Exxon, MetLife and China Construction Bank. This year Japanese car manufacturer Subaru came off the divestment list, following improvements in its emissions targets and disclosures. In 2019, Dominion Energy was one of two divested companies to be reinstated in LGIM funds following improvements.
Meryam Omi, LGIM’s Head of Sustainability and Responsible Investment Strategy, said it is expanding the programme because the approach has proved effective: “We have seen companies stepping up massively even if they're on the sanction list. We think that engagement that has that punch has meant that not only have the industries moved broadly, but also the companies that got put on the sanction list have moved.”
In this year’s revamp of the pledge, LGIM has expanded the efforts and split them in two: the first pillar is committed to broader, “rules-based and data driven” engagement with 1,000 companies, while the second focuses on conducting deeper engagement with around 50 companies selected specifically for their stance on, and relevance to, the climate transition.
Around half of the 1,000 companies will receive a letter from LGIM today explaining that they have been issued a ‘red’ warning under the asset manager’s ‘traffic light’ scoring system for climate, because they do not meet “minimum standards”. For example, they may lack comprehensive emissions disclosure or key sustainability certifications.
If the minimum criteria are not met by voting season 2021, LGIM will automatically vote against company reports and accounts. Those that remain non-compliant after that will see their chairperson voted against the following year, with divestment considered the year after.
Divestment under the Climate Impact Pledge applies to the Future World Funds, and will soon apply to LGIM’s default defined contribution funds, which cover two million people – an extension expected to be announced around the end of the year.
Omi said the decision to publish the climate ratings is about LGIM itself committing to transparency. “The Climate Impact Pledge has been well received by our clients and the market, but many people didn’t understand exactly how we were assessing companies. As an investor, we felt that we needed to commit to transparency about what kind of metrics and disclosures are important for companies.”
The climate ratings are based on around 40 indicators, including climate governance, TCFD disclosure, lobbying, and climate value-at-risk.
The original pledge covered utilities, mining, food retailers, oil & gas, financials and automakers. New sectors are cement, steel, chemicals, technology and telecoms, apparel, property, transport and food manufacturers.
On LGIM’s direct engagement with 50 companies because of their relevance to the transition, the asset manager will use a newly-developed framework to understand corporate strategies and encourage progress. The 50 firms come from 15 sectors.
“We are talking to companies not quite embracing the kind of ambition we need to see,” Omi said. “We are hoping to push them in the next two or three years to start to bring emissions significantly down globally. We need to know what kind of conversations are being had at the board-level and we need to see meaningful targets.”
Omi said the asset manager’s engagement focus has shifted from Paris alignment to more ambitious, net-zero 2050 trajectories.