The latest Intergovernmental Panel on Climate Change (IPCC) report was described by the UN Secretary-General António Guterres as a “code red for humanity”. The report described how human activity is irrefutably damaging the planet – in some cases irreversibly.
“The viability of our societies depends on leaders from government, business and civil society uniting behind policies, actions and investments that will limit temperature rise to 1.5°C,” said Guterres.
This is a huge, global challenge to which Legal & General is committed. But commitment is not enough – action is what’s needed now.
We turn our commitments into action by setting targets and measuring our progress towards them in a transparent way.
We support the goal of global net zero carbon emissions by 2050 and our contribution to this is built around three pillars: decarbonising our investment portfolio (invest), using our scale and assets to influence others (influence) and reducing our operational carbon emissions (operate).
We have the opportunity to use our scale as an investor, asset owner and asset manager to make a real impact on the transition of the world economy to net zero.
The key source of climate-related risk and opportunity for our business is through our shareholder-owned assets. We have set ourselves the ambitious transition plan of halving the carbon intensity of our investment portfolio by 2030. Legal & General Retirement (LGR) has gone one step further and committed to reducing its portfolio carbon emission intensity by 18.5% by 2025.
Among other steps toward sustainable investing, we have increased our investments in renewable energy and low carbon technology, and all new homes built by our housing business will be capable of net zero carbon operation from 2030.
We also aim to reach operational net zero for our offices and for business travel by 2030.
To measure our progress and make sure that we are having a real-world impact, we have signed up to the Science-Based Targets initiative (SBTi), which further aligns our carbon reduction targets to the Paris objective of limiting global warming to 1.5°C above pre-industrial levels. SBTi ensures that companies’ targets translate into action consistent to achieve a net-zero world by 2050. By signing up to the SBTi, we must report on our targets within two years, then demonstrating how we will achieve these commitments.
An example of how this is working in practice is our Group operational targets, which are a focal point for 2021 as we develop detailed and timebound plans within all of our businesses to keep us on track with our roadmap to net zero. These plans will involve science-based targets and will provide milestones against which we will report our progress, ensuring we maintain transparency.
We are also encouraging the wider business community to come along on the journey to net zero, even those companies outside of our investment portfolio. As the IPCC said in its report, creating the change that’s needed will require leaders of all stripes to work together. That’s why Michelle Scrimgeour, Chief Executive Officer of LGIM, is a co-chair of the COP26 Business Leaders Group, which is championing climate action in the private sector.
When it comes to our own contribution, it is how we work with the companies we invest in that has the potential to drive the biggest change.
As a financial services company, and looking at our investment portfolio, we can only invest in the universe of assets that are available. We can help direct the flows of capital to supporting those firms that are transitioning and supporting net zero objectives. Using our influence is a really important part of our approach because we are dependent on the real economy making those changes.
Indeed, our Group net zero strategy has influence at its core. “We leverage LGIM’s whole voice, whether that is through our analyst discussions with companies or engagement conducted by our dedicated stewardship team – to influence positively and hold companies to account on their climate strategies and commitment to net zero,” says Catherine Ogden, Sustainability & Responsible Investment Manager at LGIM.
A key tool is our Climate Impact Pledge (CIP), a targeted engagement programme to encourage companies to step up their ambitions towards net zero. Through the CIP, we have assessed about 1,000 companies in climate-critical sectors globally against 40 key indicators. Using quantitative and qualitative measures, we score them using a ‘traffic light’ system and place these ratings in the public domain, drawing on independent data providers and our pioneering climate modelling.
When companies do not make adequate climate commitments, we make use of voting and investment sanctions. Our 2021 results show that over the past year, 13 out of the 58 companies we engaged with in depth now have a net zero target in place. Under our approach, divestment is seen as a last resort and we much prefer to see current high carbon emitters transitioning their business model through our engagement.
However, with many businesses still learning how to measure their own climate impact, access to good quality data can be difficult for financial services organisations that are committed to sustainable investing. “We’re very dependent on the quality of disclosures that firms are making,” says Walford. “Increased, high-quality data that’s comparable across different sectors is one of the reasons why we’re such a strong supporter of the Task Force on Climate-related Financial Disclosures (TCFD).”
Our TCFD report documents our progress on addressing climate change and provides transparency about whether we are meeting our targets. It also contains our methodologies and key carbon data sources.
While no company has developed a perfect formula for addressing climate change, we believe that more accurate metrics, greater transparency and better reporting are an essential basis for the continuous improvement to which we are committed.
The climate emergency and how it can be tackled will evolve down the years, but one thing that will stay consistent is the level of urgency. That’s why we place emphasis on action, not just commitments.
Through our invest, influence and operate strategy, coupled with transparent measurement of our progress, we are stepping up to the challenge.