LGIM to target firms failing to put up credible climate plans with proposals in 2023

London-based investment giant warns corporates on ‘half-baked’ climate plans and outlines escalation pathway for next year.

Legal and General Investment Management (LGIM) has revealed plans to file shareholder proposals at companies failing to put “suitably ambitious and credible transition plans to a shareholder vote,” starting next year.

The London-based investment giant added that this escalation would “likely” be undertaken in conjunction with Climate Action 100+ (CA100+), the investor engagement behemoth targeting the world’s biggest polluters.

The blog was written by LGIM’s senior global ESG manager, Jeannette Andrews and manager, sustainability & responsible investment, Catherine Ogden and published earlier this week.

In it, LGIM’s 2022 expectations on what constitutes a credible corporate climate plan were also spelled out, with a warning that “half-baked” ones – meaning those that are misaligned with a 1.5°C warming trajectory – would be “strongly discouraged.”

LGIM did not explicitly state in the blog that it will vote against plans which are not science-based, but outlined four expectations that will underpin its position on so-called ‘Say on Climate’ votes – including looking for “[c]redible targets that are aligned to a 1.5°C trajectory”.

On targets, the investment giant added that gaining “approval and verification by SBTI [Science Based Targets Initiative] (or other external independent parties as they develop) can help demonstrate the credibility and accountability of plans.”

When asked if LGIM will vote against any plan that hasn’t been verified as science-based, a spokesperson told RI that it considers “independent verification as a key mechanism for providing us with assurance that transition plans are aligned with net zero.”

They added that when it comes to plans LGIM does not regard as credible, it will vote against. “LGIM does not abstain, we always send a clear message by voting for or against resolutions,” they said.

Verification of carbon intensive firms’ plans has, however, been complicated by the recent decision by SBTi to cease certifying targets for fossil fuel firms for the time being while it develops a new methodology for the sector.

In the absence of SBTi sector guidelines or validation, the LGIM spokesperson told RI, “We will utilize the resources we have at our disposal to assess the alignment of plans,” including “in-house climate expertise, our own engagement activity, investment research and external sources and tools such as CA100+ Benchmark and TPI assessments”.

Last year, ‘Say on Climate’ votes put forward by European firms received near unanimous approval, giving rise to fears that inadequate plans are being approved. Research by proxy solicitation company, Georgeson, for example, found that average support at European firms in 2021 was around 97 percent.

Oil giant Shell and miner BHP were among the few firms to receive lower than 90 percent support, with 88.7 percent and 84.9 percent, respectively.

LGIM revealed that it voted “against several high-profile proposals due to concerns that the transition plans proposed were not sufficiently robust or credibly aligned with net zero” – including a vote against Shell’s plan.

A lack of consensus exists in the market about what makes a credible transition plan. For instance, the Church of England Pension Board, which co-leads engagement on Shell as part of CA100+, publicly backed the company’s strategy and announced it would vote against the proposal filed by Dutch activist Follow This, calling for short-, medium- and long-term Paris-aligned reduction targets covering all emissions (Scope 1,2 & 3).

The disclosure of “short-term (up to 2025), medium-term (2026-2035) and long-term (2036-2050) targets covering scope 1 and 2 emissions and material scope 3 emissions,” is another of LGIM’s expectations for climate plans in 2022.

Investment firm Candriam, which today announced record assets under management of €158 billion, also revealed that it opposed around 25 percent of company management resolutions, “particularly in relation to ‘Say on Climate’.”

In assessing corporate transition plans, LGIM said it would, in part, “lean on proxy providers.” But the big advisors too have been split on climate plans.

Ahead of the vote at BHP’s London-listed arm in October, RI reported that influential proxy advisors ISS and Glass Lewis disagreed. The former gave its “qualified support” for BHP’s Climate Transition Action Plan, describing it as “reasonable, given the state of technological innovation”. Whereas Glass Lewis advised shareholders to reject the plan, citing concerns over BHP’s “lack of science-based targets and its Scope 3 emissions reduction initiatives.”

‘Say on Climate’ votes are the brainchild of Sir Chris Hohn and his UK hedge fund The Children’s Investment Fund (TCI), which launched a namesake initiative in 2020 to push companies to offer shareholders an annual advisory vote on their climate plans. The initiative was launched following TCI’s success in getting such a vote at Spanish airport firm Aena and quickly gained traction.

But from the off it divided those in the responsible investment world, with some viewing it as a pathway to holding boards accountable and others seeing as repeating the mistakes of the ‘Say on Pay’ campaign a decade ago, which failed to achieve change on executive compensation packages.

Last month, the UN-supported Principles for Responsible Investment (PRI) suggested in new guidance that the benefits of Say on Climate votes could be “outweighed” by associated “risks and potential unintended consequences.”

It highlighted a “central risk” that these advisory votes can “become an ineffective compliance mechanism if companies put forward plans that do not align with global climate goals”. It added that this is a “significant risk because management proposals almost always obtain majority support from shareholders”.

At the same time, RI reported that US non-profit As You Sow, a prolific flier of shareholder proposals and early supporter of the Say on Climate initiative, would no longer be asking companies for an advisory vote on climate plans in its resolutions, opting to ask for GHG reduction targets instead.