Climate-Critical Industries Not Meeting Minimum Targets – LGIM

UK asset manager deepens engagement across sectors, wielding voting sanctions and divestment against laggards.

Legal and General Investment Management’s (LGIM) engagements across 15 sectors with the biggest climate impact have revealed several industries aren’t doing enough to transition to net-zero greenhouse gas (GHG) emissions. This is according to LGIM’s annual Climate Impact Pledge report, which found that corporates across sectors such as utilities, banking, airlines and steel aren’t meeting the asset manager’s minimum climate standards.

The Climate Impact Pledge was first launched in 2016 as part of LGIM’s commitment to managing its exposure to climate-related risks across its portfolios. The firm strengthened its pledge in 2018, expanding its engagement focus from 80 global companies in one fund to over 1,000 across 15 climate-critical sectors.

LGIM’s engagements over the past year have revealed a “significant variation” in climate commitments and progress across sectors. For example, while 40% of apparel corporates engaging with LGIM now meet the asset manager’s minimum climate targets (known as “meeting red lines”), just over 20% have made net-zero commitments.

LGIM’s red lines are slightly different according to sector, requiring apparel and food corporates to have a deforestation policy, while utilities need to demonstrate that they have a coal phase-out plan. Across all 15 sectors, however, LGIM expects firms to set net-zero targets.

If corporates don’t meet these red lines, then LGIM will first deepen engagement, subject the corporate to voting sanctions (130 corporates are subject to voting sanctions this season) and then, as a last resort, divest.

In 2020, the firm targeted 58 specific corporates that LGIM believes are climate laggards within their sectors.

“These 58 companies are influential in their sectors, but in our view are not yet leaders on sustainability; we believe they can and should embrace the transition to net-zero carbon emissions in the next few years,” the report noted.

LGIM has imposed a voting sanction during the 2021 proxy season on Air China, as the firm has not responded to engagement efforts over its lack of an operational emissions reduction target.

LGIM, which has US$1.7 trillion in AUM, will also remain divested from insurance company Japan Post, which, despite already losing out on LGIM’s investment, has yet to publish a thermal coal policy or disclose its Scope 3 emissions associated with its investments.

However, LGIM’s increasing levels of engagement with climate-critical sectors has largely had a positive response from corporates, the report said.

Almost three-quarters of these companies have responded positively to LGIM’s engagement campaign, with 13 out of the 58 companies publishing net-zero targets in the last year.

US food retailer Kroger, which was previously on the exclusion list, will be reinstated in relevant funds due to improvements in its deforestation policies and disclosure, the report noted.

This follows the announcement that LGIM increased its overall engagement with corporates on climate-related risk by 63% in 2020 compared to the previous year, according to the firm’s ‘Active Ownership’ report, published in March 2021.

“Progress cannot be made by acting in isolation and we, as investors, have a real role to play in the responsible allocation of capital and acting as stewards to our investee companies to encourage greater progress to meet our overall sustainability goals,” said Michelle Scrimgeour, LGIM CEO.

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