31 Mar 2021
L&G’s Workplace DC business, together with the L&G Mastertrust, have unveiled their proposed roadmap to achieve net-zero by 2050 across all of their auto-enrolment default investment options*, and builds on L&G’s commitment to net zero by 2050. This announcement coincides with the publication of LGIM’s tenth annual Active Ownership Report.
In December 2020, LGIM pledged to work with clients to increase the proportion of assets managed under a net zero target and today’s announcement represents an important milestone on this journey. The framework will be available to over 4 million DC scheme members and £53bn AUM and includes targets of c. 50% reduction in carbon emissions intensity within its Multi-Asset Funds and c. 60% for Target Date Funds, with the growth phase targeting 65%, with variation across funds depending on their investment strategy (see table below). Aligned to this, L&G has established a roadmap to enable the Mastertrust’s auto-enrolment defaults to target reduced carbon emissions intensity, including the setting of minimum climate expectations for investee companies. In 2019, the L&G Mastertrust was the first to offer an ESG default option and this commitment further represents the strengthening of L&G’s responsible investment offering for pension scheme members.
These targets are designed to reflect the beginning of alignment with the Paris Agreement goal to limit warming to 1.5°C and are expected to be reviewed periodically in-line with the best available science-based approaches and industry practice, such as the Paris-Aligned Investment Initiative. All targets are relative to end-2019 data and focused on portfolios’ listed equity and publicly traded corporate debt exposure.
Reductions are expected to be achieved using a combination of the use of climate transition/aligned benchmark indices in some index tracking funds, selective divestment where appropriate and a focus on re-shaping exposures within priority sectors. In parallel to reducing emissions, the relevant investment strategies will also seek to increase their exposure to climate solutions – such as sustainable forestry and renewable energy.
This announcement follows a year of significant progress in which LGIM has already achieved an estimated 23% carbon emission intensity reduction on default multi-asset funds (compared to what it would have otherwise been end of 2019) and an estimated 30% on its Target Date Funds, with a further 20% by 2025 and then a further 15% by 2030, all relative to end of 2019. It has also transitioned £11 billion within its default funds equity exposure from a standard market cap weighted index to tracking indices which enforce minimum standards on investee companies. This includes applying the Climate Impact Pledge, launched in 2016, which includes divestment sanctions against investee companies which do not meet LGIM’s expectations, which has been incorporated into all its auto-enrolment defaults. This has resulted in approximately £170 million of selective divestments, including £75 million from coal companies and Climate Impact Pledge divestments. All of these changes are necessary to address climate risk as a financially material risk factor to clients’ portfolios.
LGIM’s Destination@Risk model will further enhance our understanding and management of the risk profile of the funds against specific climate related scenarios and allows the robust measurement of the climate risk embedded in investors’ portfolios and their climate alignment. LGIM’s investment teams will be able to access the climate risk and temperature alignment forecasts of the Destination@Risk within the climate risk dashboard, enabling them to partner with clients to design and implement ‘Pathways to Paris’ solutions.
LGIM will also report to the L&G Mastertrust on the evolution of the temperature alignment of portfolios. We believe this additional reporting and newly announced targets, coupled with LGIM’s ongoing engagement activities on climate, are aligned with best practice recommendations for schemes’ climate targetsi:
Emma Douglas, Head of Defined Contribution at LGIM: "As the UK’s largest DC provider, we are fully supportive of achieving the target of net-zero by 2050 and the roadmap we are setting out today provides further detail as to how we plan to de-carbonise our own range of auto-enrolment defaults and those of the L&G Mastertrust. Climate change is the defining challenge of our generation and an area of great concern to many of our members. As the innovations and change required to deliver net-zero materialise, we will continue to evolve our roadmap for the coming years and use our proprietary framework to monitor the progress. Our roadmap to net zero is a significant step in assuring our members that their retirement savings are influencing real change."
Dermot Courtier, Independent Chair of the L&G Mastertrust and Independent Governance Committee: "Managing climate-related risks on behalf of our members is a crucial financial factor and a key priority for the Trustee Board. We are delighted that L&G has followed up on their commitment to net zero within the default funds with this clear ESG and climate change roadmap to enable us to ensure the long-term performance of our investments and improve member outcomes in retirement. These timelines and milestones will further support us in overseeing the progress to net zero on behalf of our scheme members and we look forward to collaborating with L&G as we progress on this important journey."
Commenting on Legal & General’s Net Zero commitment, Richard Curtis, Co-Founder at Make My Money Matter: "This ambitious announcement from Legal & General shows that the race to the top among pension providers is picking up pace. Since we launched our campaign to green the UK's pensions industry, schemes have been making more and more ambitious commitments, and L&G’s pledge shows what is possible when providers harness the power of our pensions to build a better world. Their target of reducing emissions by 65% by 2030 is particularly encouraging, and demonstrates the speed and urgency required by providers to combat the climate crisis. When I spoke with L&G members last year I heard loud and clear that they wanted to see their pensions go green, and it’s fantastic that these voices are being heard. Now is the moment for the rest of the industry to follow suit and ensure that by November’s COP26 summit everyone in the UK has a pension they can be proud of."
Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with over £1.2 trillion in total assets under management* of which 39% is international. We have a unique and highly synergistic business model, which continues to drive strong returns. Legal & General provides powerful asset origination and management capabilities directly to clients, which also underpin our leading retirement and protection solutions. We are a leading international player in Pension Risk Transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Our purpose is to improve the lives of our customers and create value for our shareholders. Through inclusive capitalism, we are investing in long-term assets, such as real estate and infrastructure, that can help build a better society for the future.
Legal & General Investment Management
LGIM is one of Europe’s largest asset managers and a major global investor, with total assets under management of £1.16 trillion1 ($1.47tn, €1.35tn, CHF 1.31tn). We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
For more than 50 years, we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property, and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
1 Data as at 30 June 2023. Data combines assets under management by LGIM in the UK, LGIMA in the US and LGIM Asia in Hong Kong.
Assets under management include securities and derivatives positions
*as at HY 2023