Climate Impact Pledge: Moving the needle on net zero

This blog summarises some of the highlights from our latest Climate Impact Pledge report, which you can read here.

We believe climate change is an important systemic risk to our clients’ portfolios. With the world recently experiencing its first annual average temperature overshoot of 1.5˚C,¹ it is more important than ever to tackle this issue.

Our Climate Impact Pledge (CIP) assessments and engagements show there is much more that companies can do to mitigate climate risks to achieve net-zero carbon emissions by 2050. Over the years, we have seen some progress, but overall we consider that the transition must accelerate. This year, we have engaged with more companies than ever before.

We publish our expectations and engage with companies, on behalf of our clients, to encourage them to mitigate the systemic risks of climate change.

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 has engaged 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, where appropriate, even divestments can be applied.² This is an example of our ‘engagement with consequences’ approach.

CIP by the numbers

• 5,000+: the number of companies across 20 ‘climate critical’ sectors covered by the CIP
• 100+: the number of selected ‘dial-mover’ companies for direct engagement chosen for their size and potential to galvanise action in their sectors
• 86%: the percentage of the total carbon emissions attributable to LGIM’s corporate debt and equity holdings covered by the CIP³

What’s new?

In April 2024, we communicated with over half of the 5,000+ companies assessed under our CIP quantitative assessment, our largest engagement campaign to date on any topic.

We have put a focus on three emission-intensive⁴ sectors by integrating baseline expectations relating to methane emissions disclosure and no new thermal coal which will drive our climate-related voting for companies in the oil & gas, mining and utilities sectors.

In this year’s report we also highlight progress and improvements made by investee companies.

Our results in a nutshell

• 91%: response rate to our outreach with 100+ dial-moving companies. We met with 81% up from 75% in the last engagement cycle
• 492: total number of companies identified as subject to vote sanctions against the chair of the board given climate concerns, up from 342 in 2023
• 16: the total number of companies in our divestment list⁵; 14 remain in the list and we will divest from an additional two – TJX* and Glencore* – for continuing to fall short of our key expectations

Engagement conversations are about business strategy

We engage as universal owners, aiming to reduce systemic risks across funds and markets. When we engage with companies, we outline our expectations of disclosures and action on climate change to reduce those risks.

As world gets closer to key energy transition dates, companies face harder choices. The decisions required for transition by companies and wider society will be shown in starker relief.

We highlight in the report some key themes:

• Public policy plays a vital role: Our engagements continue to highlight the importance of policy and regulatory standards. For example, utility company transition plans can be affected by state or national energy policies, as well as the transition pace of other energy suppliers. More policy change is required for the world to meet its net-zero ambitions.
• There is still insufficient disclosure of Scope 1 and 2 emissions: Without knowing the emissions companies generate, investors cannot hold companies to account for reducing those emissions sufficiently. We were surprised to find that about one-third of the companies we assessed did not appear to report Scope 1 and 2 emissions. It is likely that some companies report these in ways which are not straightforward to identify. Nevertheless, we have written to companies in our assessment to highlight the necessity to identify and disclose emissions. We are also engaging with data providers on this issue. We also expect companies to disclose and address material Scope 3 emissions.⁶
• Transition pace: The pace of transition is neither fast enough nor smooth enough, in our view. However, change is happening, and in some cases it’s happening faster than many had expected – for example, the accelerated deployment of solar photovoltaics.⁷ Companies and policymakers need to be ready.

We believe that responsible investors have an important role engaging with companies, understanding the challenges they face, and encouraging significant action to mitigate the systemic risks of climate change.

Learn more by reading the Climate Impact Pledge report.

* For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Sources

1. The period from February 2023 to January 2024 reached 1.52C of warming, according to the EU's Copernicus Climate Change Service.

2. Companies 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.

3. As at December 31 2023. Percentages are calculated by looking at corporate equity and debt holdings only. Percentages are calculated for 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.

4. Emission-intensive sectors are defined as Oil & Gas, Mining, Electric Utilities, and Multi-Utilities (except water and gas utilities) sectors.

5. Companies 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.

6. Our CIP methodology document and sector guides list our expectations. See also pages 34-36 of our CIP report.

7. See LGIM Blog: Challenges in a changing world: financial discipline and systemic risk