Legal & General Investment Management (LGIM) has nailed its green colours to the mast and is taking an active approach to encouraging clients and companies around the world to become more sustainable.
“We take a multifaceted approach and have for a number of years been using active ownership to engage with companies on environmental, social and governance (ESG) issues on behalf of clients,” says head of client business for Ireland Richard Kelly.
“This goes back decades, but it is more important than ever now. We will vote against policies which are not sustainable at company agms, and we put those votes up on our website the next day. It is fully transparent.”
It’s not all negative, though. “More importantly, we are having conversations with our clients and with companies about the transition to net zero. We are committed to the net zero 2050 target and the Paris Agreement, and we are working with clients to help them transition their portfolios.
“We are making them aware of the opportunities presented by the transition as well as the risks involved in not doing so. As a company we also work with regulators and policy-makers to push the net zero agenda. Our CEO Michelle Scrimgeour is a member of UK government’s COP26 Business Leaders Group.”
Those conversations are framed against the backdrop of the LGIM Climate Impact Pledge which gives climate ratings to over 1,000 companies around the world based on a range of quantitative metrics. Companies that fall short of LGIM’s minimum climate risk standards risk reduced investment allocation or even complete divestment from funds.
“We brought in the Climate Impact Pledge back in 2016,” says Kelly. “We initially worked with 80 companies who were the heaviest polluters and energy users and most important in terms of transition. We wrote to them to explain the importance of climate allocation, and said if they didn’t start to engage we would begin to lower their allocation. The pledge has since been expanded to cover more than 1,000 companies.”
Some companies have been excluded from LGIM funds due to a lack of engagement. And some companies previously excluded are now back in following engagement. These include Subaru, Dominion Energy and Occidental Petroleum.
“We try to take an approach of working with companies and not against them,” he adds. “For example, we met with BP nine times last year to discuss their net zero ambition.”
Governance
And it’s not just about climate. “While 2019 was the year of Greta Thunberg with everything focused on the climate crisis, 2020 was the year of Covid and everything social,” says Kelly. “The social and governance aspects had for years been down the pecking order somewhat.”
On March 27th last year LGIM wrote to companies about the importance of the social aspect, and communicated quite an unusual message. In effect, it said that LGIM was not going to reduce its investments in a company purely because it missed a dividend target as long as it continued to look after its people and stakeholder value in the round. A reward for prioritising social aspects, in other words.
LGIM clients are increasingly expressing a desire to transition their investment portfolios. “Everyone wants to feel that their pension is being put to good use,” says Kelly. “They don’t want it to be invested in companies with bad labour practices or poor governance. We have seen in the Irish market what poor governance can lead to.”
And there are ways to do make the transition which do not involve massive disruption, according to Kelly.
“If you take a client invested in a standard global portfolio based on something like the MSCI World Index. They might want the same return as that but more tilted towards ESG or aligned to the Paris Agreement targets. We have a 28-factor scoring methodology which rates each company, and we can increase or decrease the stock’s weighting depending on its ESG score which we publish.”
Subject to regulatory approval, LGIM is planning to launch in the coming months a new Paris-aligned fund using that ESG scoring methodology.
“From day one the fund will offer a 50 per cent reduction in greenhouse gas (GHG) emissions intensity compared to a comparable global portfolio, and it will deliver a further 7 per cent greenhouse gas intensity reduction on average per annum after that,” says Kelly.