Moving the needle on net-zero: expanding our climate engagement reach

Legal & General, today announced the results of its eighth Climate Impact Pledge (CIP) – its annual engagement programme to raise market standards and encourage companies to play their part in achieving the goals of the Paris Agreement. This year Legal & General Investment Management (LGIM), part of L&G’s asset management division and one of the world’s largest asset managers¹, has engaged with more companies on climate issues than ever before; introducing baseline expectations for three sectors; and adding two companies to its divestment list. While findings of the Climate Impact Pledge point to improvements, LGIM believe companies need to do more to play their part in efforts to mitigate climate change risks.

Through its investment stewardship approach, LGIM engages with companies seeking to address systemic risks linked to climate change across the global economy and markets, as well as clients’ portfolios. With forecasts indicating that global temperatures will rise by more than 2˚C, significantly missing the Paris Agreement objective to limit warming to 1.5˚C by 2100, this year saw significant expansion of LGIM’s engagement outreach. LGIM also introduced baseline expectations for three emissions intensive sectors:

• Methane emissions disclosure by the oil and gas industry;
• No expansion of thermal coal mining or power generation capacity for the mining and utilities²

The Climate Impact Pledge assesses over 5,000 companies across 20 ‘climate critical’ sectors. These assessments can lead to vote sanctions, which are typically a vote against the company chair. Within this universe of companies, LGIM engages directly with a group of 100 ‘dial movers’, identified for their size and potential to galvanise climate action in their sectors. Where the rate of progress is too slow, vote sanctions and even divestments can be applied.

While there has been progress across Climate Impact Pledge constituents this year, the global pace of transition remains insufficient. LGIM therefore continues to apply its approach of ‘engagement with consequences’ – where, this year, the number of companies identified as subject to voting sanction increased and Glencore, a mining company, and TJX, a retailer, have joined its divestment list.

2024 at a glance

During the 2024 proxy season, LGIM engaged over 2,800 companies on climate – more than ever before. A total of 492 companies were identified as subject to vote sanctions against the chair of the board, up from 342 in 2023.  The Climate Impact Pledge covers 86% of the total carbon emissions attributable to LGIM’s corporate debt and equity holdings³.

From the quantitative assessment of 5,000+ companies captured in LGIM’s universe of emission-intensive sectors, 106 companies were identified as being subject to voting sanctions for not meeting its new baseline expectations, while an additional 349 companies were identified as being subject to voting sanctions for not meeting LGIM’s minimum climate change standards. LGIM also raised expectations of the number of minimum standards Japanese companies needed to meet from one to three.

LGIM also targeted over 100 ‘dial mover’ companies to meet and discuss its transition expectations. It may apply voting sanctions against 37 of these companies, down from 43 in 2023, indicating notable progress in the group of companies with which it meets.

The 2024 season also saw LGIM co-file its first shareholder resolution in Japan, at Nippon Steel – the largest steel maker in Japan and one of the largest globally in terms of production – calling on the company to become a regional leader on climate-related lobbying disclosures.

Engagement with consequences

This year, LGIM is divesting from Glencore, a mining company, and TJX, a retailer, with both companies failing to sufficiently address concerns raised in recent years. This raises the number of divestments through the Climate Impact Pledge to 16, applying across funds covering around £176 billion in assets under management, including funds in the Future World fund range, LGIM’s ESG fund ranges, and all auto-enrolment default funds in L&G Workplace Pensions and the L&G Mastertrust⁴.

Climate Impact Pledge divestments are used to signal not only to the companies, but the wider sector and market, that there has been insufficient progress made in mitigating climate change risks. LGIM continues to engage with companies on its divestment list and will take companies off the list when sufficient progress is made.

The divestment from Glencore follows extensive engagement with the company since the first Climate Impact Pledge launched in 2016. LGIM filed a shareholder resolution at Glencore last year, requesting that the company disclose how its projected thermal coal production aligns with the Paris Agreement and efforts to limit the global temperature increase to 1.5°C. LGIM remains concerned that Glencore has not disclosed plans for thermal coal production that are aligned with a net zero pathway.

LGIM remains concerned over TJX’s absence of a zero-deforestation policy and insufficient disclosure of material Scope 3 emissions that fail to account for its material value chains’ emissions.

Although LGIM did not remove any companies from its divestment list this year, some, such as Loblaw, Invitation Homes and COSCO Shipping Holdings, demonstrated progress. LGIM will continue to engage constructively with these companies.

Highlighting progress

The Climate Impact Pledge ratings highlight progress in corporate activities when it comes to the management and measurement of climate risk. Significant improvements in ratings were observed since 2023 in companies’ climate disclosure and Scope 3 reporting themes, followed by net zero ambitions. Climate lobbying and climate governance also witnessed notable progress.

At a regional level, markets demonstrated an increase in their average CIP score, except for China and the US. While European countries still lead the pack, Brazilian and Australian companies saw notable improvements.

Whilst progress since 2016 has been noted, the Climate Impact Pledge continues to indicate that the pace of the transition must accelerate if the world is to achieve net-zero carbon emissions by 2050 and mitigate seismic consequences to our planet, global financial prosperity, and companies’ ability to generate sustainable financial returns.

References:

¹Willis Towers Watson: Thinking Ahead Institute – The world’s largest 500 asset managers Report, October 2023.

²Electric Utilities, and Multi-Utilities (except water and gas utilities).

³As at December 31 2023. Percentages are calculated by looking at corporate equity and debt holdings only. Percentages are calculated for the aforementioned holdings where carbon data can be found. Carbon data is from ISS, using ESG data and reporting enrichment to map to issuers of corporate bonds.

⁴Companies are divested from selected funds with £176 billion in assets (as at 31 December 2023), including funds in the Future World fund range, LGIM’s ESG fund ranges, and all auto-enrolment default funds in L&G Workplace Pensions and the L&G Mastertrust. Companies are divested up to a pre-specified tracking-error limit. If the tracking error limit is reached, holdings are reduced rather than fully divested. LGIM's total AUM was £1.159 trillion, LGIM internal data as at 31 December, 2023. The AUM disclosed aggregates the assets managed by LGIM in the UK, LGIMA in the US and LGIM Asia in Hong Kong (2018-2019 only) and LGIM Singapore from July 2023. The AUM includes the value of securities and derivatives positions.