LGIM dials up its engagement on climate, as window to achieving 1.5 degrees rapidly closes

Legal & General Investment Management (LGIM), one of the world’s largest asset managers, has today announced the results of its seventh Climate Impact Pledge – its annual engagement programme to encourage companies to tackle climate change and the transition to net-zero carbon emissions.

As the window to limit global warming to 1.5 degrees narrows, LGIM has this year expanded the scope of the Climate Impact Pledge, holding more companies to account than ever before through voting and investment sanctions. It is now assessing 5,000+ companies across 20 climate critical sectors, a significant step forward from the circa 1,000 companies across 15 sectors in last year’s Climate Impact Pledge.

As a result of this expanded approach, LGIM has identified 299 companies through its quantitative analysis that qualify for AGM voting sanctions for not meeting its minimum standards to address climate risk.

In addition to its quantitative assessment, LGIM has conducted more targeted and direct engagements with 105 ‘dial mover’ companies, a 75% increase from the 60 companies identified in 2021. ‘Dial-mover’ companies are chosen for their size and potential to galvanise action on climate in their sectors. Engagement is usually year on year as LGIM encourages change, with consequences including voting sanctions and, for applicable funds, divestments.

LGIM will apply voting sanctions against 43 of these dial movers, including those companies on the divestment list¹. 12 companies remain on LGIM’s divestment list. These companies are AIG, China Construction Bank, China Resources Cement, Exxon Mobil, Hormel, Industrial Commercial Bank of China, Invitation Homes, KEPCO, Loblaw, MetLife, PPL and Sysco.

LGIM has also announced two further divestments from companies that are failing to meet its standards on climate - Air China and COSCO Shipping Holdings - taking the total number of companies on LGIM’s divestment list to 14.

In a positive development, China Mengniu Dairy has been reinstated. Following direct engagement, the business has now published a deforestation policy, committed to carbon neutrality by 2050, and delivered on LGIM’s red lines.

Pledge expanded to incorporate biodiversity risk and climate lobbying activity

LGIM has not only expanded the scale of its pledge, but the expectations that underpin it, with a greater focus now placed on the link between biodiversity and net-zero strategies, as well as climate lobbying activities.

LGIM’s expectations for ‘dial-mover’ companies now include:

• LGIM expects to see comprehensive, certified net-zero emissions targets, including disclosing a transition plan with short and medium-term targets
• Companies must disclose the actions and investments embedded in their plan to reach net-zero
• LGIM expects each company to disclose whether its executive remuneration is aligned with the company’s short and / or medium-term emission targets
• To achieve the policy environment requirement in the Paris Agreement, LGIM has set a ‘red line’ for all sectors on the disclosure of climate lobbying activities, including trade association memberships, and explaining what actions it will take if the lobbying activities of these associations are not aligned with a 1.5°C scenario
• LGIM emphasises the importance of combating biodiversity and nature loss, and integrating social implications, in delivering a credible pathway to net zero:
  • For sectors with a clear link between biodiversity and net-zero strategies, companies should assess their impacts and dependencies with a view to managing risk, as well as mitigating and reversing negative impacts
  • For sectors where the transition could have direct social implications, LGIM expects companies’ decarbonisation strategies to incorporate a ‘just transition’ perspective

Oil & Gas fails to meet LGIM’s standards

Despite record oil & gas profits, over a third of companies in the sector failed to meet our minimum standards and most did not have sufficiently ambitious emissions targets.

The Banking, Insurance and Property sectors have also been singled out as lagging when it comes to setting and meeting ambitious net-zero targets.

LGIM notes that these industries have the power to lead the way in reallocating capital and decoupling economic growth from carbon emissions.

List of ‘climate critical’ sectors expands

The number of ‘climate-critical’ sectors has increased from 15 to 20, now including Forestry and Paper & Pulp, Aluminium, Glass, Logistics and Multi-utilities.

As a result, higher standards and more urgent action will be required from these companies. However, LGIM notes that a number of these newly included sectors such as Aluminium, Glass and Forestry lead the way in terms of the scale of their ambition and meeting LGIM’s minimum standards.

Europe and UK lead on climate targets, with improvements in Asia

While UK and France still lead the pack, out of select countries shown on the chart, Korean and Chinese companies have seen the most significant improvements. Japan also saw notable improvement between 2021 and 2023.

Although the US has improved its average scores year on year, progress remains one of the slowest compared to other geographies.

LGIM continued to see positive response rates to its global direct engagements, witnessing an 80% response rate this year from its dial mover companies, up from 78% in 2022.

Companies in emerging markets (including China, India and Malaysia) were less responsive to LGIM’s request to engage on climate issues. Among 21 non-responsive companies, 13 (62%) were in emerging markets². When companies are unresponsive to our engagement requests, we assess their performance using the company’s public disclosures and external sources.

References

¹As at 31 December 2022.

²Where exclusions cannot be applied, we apply a vote sanction.