L&G Workplace Pensions and L&G Mastertrust set out roadmap to net zero by 2050

•  New framework targets carbon emissions intensity reduction of 50% by 2025 and 65% by 2030 in target date default
  
  
• Available to over 4 million DC scheme members and £53bn AUM
  
  
• Reflects journey towards Paris Agreement goals of a 1.5°C degree scenario

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.

Net zero portfolio evolution

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.

LGIM’s engagement progress

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: