LGIM dials up net zero engagement as manager’s divestment list grows
Michael Marks, LGIM's head of investment stewardship, explains why the investment manager is increasingly engaging aggressively with its portfolio companies
Investment management giant Legal & General Investment Management (LGIM) is dialling up its engagement on climate-related issues as the firm disclosed what it has done in recent months to drive its portfolio companies towards net zero.
LGIM, one of the world’s largest asset managers, said it is currently assessing roughly 5,000 companies across 20 sectors, compared to around 1,000 corporates in 15 sectors a year ago, "holding them to account through voting and investment sanctions."
And to demonstrate LGIM's statements are not merely hollow words, the firm confirmed to Net Zero Investor it has singled out 299 companies that "qualify for AGM voting sanctions for not meeting its minimum standards."
'Dial mover' companies
LGIM said its increasingly more targeted and direct engagement approach has resulted in a list of 105 so-called ‘dial mover’ companies, a 75% increase from 60 companies last year.
‘Dial-mover’ companies are chosen for their size and potential to "galvanise action on climate" in their sectors. Engagement is usually year on year, with consequences and actions that include voting sanctions and divestments.
"When we’re speaking to asset owners about our approach to stewardship, the key point is that engagement with consequences is the best way to deliver long-term, systemic change on a global scale," explained Stephen Beer, senior manager for sustainability and responsible investment at LGIM.
And efforts are gradually paying off, it seems. This year, LGIM had an 80% response rate 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 were in emerging markets.
Beer told Net Zero Investor: "Those that do not engage, or take heed of our drive for minimum standards, will find that we will use a range of stewardship tools to influence a better outcome. These include voting against specific resolutions at these companies or, as a last resort, withholding investment while continuing to engage."
The firm stressed it is more and more placing a greater focus on the link between biodiversity and net zero strategies, as well as climate lobbying activities.
It expects to see comprehensive, certified net zero emissions targets, including disclosing a transition plan with short and medium-term goals.
Moreover, LGIM demands companies disclose the actions and investments embedded in their plan to reach net-zero.
Also, it expects each company to disclose whether its executive remuneration is aligned with the company’s and medium-term emission targets.
LGIM revealed it plans to apply voting sanctions against 43 of these dial movers, which include corporates on its so-called 'divestment list'.
At present, 12 companies are on that list: AIG, China Construction Bank, China Resources Cement, Exxon Mobil, Hormel, Industrial Commercial Bank of China, Invitation Homes, KEPCO, Loblaw, MetLife, PPL and Sysco.
LGIM also said it recently decided to divest from two more 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.
“Companies which are too slow to act are contributing to systemic risk," explained Michael Marks, head of investment stewardship at LGIM.
"It is imperative that investors play their part, by expanding and deepening the scope of their climate engagement, and encouraging companies to scale up their ambitions and reduce real world emissions," Marks added.
Some of LGIM's recent engagement efforts have paid off.
The firm singled out China Mengniu Dairy. Following direct engagement, the business recently published a deforestation policy, committed to carbon neutrality by 2050, and "delivered on LGIM’s red lines," as the investment manager put it.
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.
“From tackling climate lobbying to incorporating biodiversity risk, expectations of companies are increasing," Marks summarised.
"Insufficient progress represents a systemic challenge which we will continue to challenge through the tools at our disposal, including divestment and voting sanctions," he noted.
Marks emphasized 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, Marks explained.
Zooming in on oil & gas, over a third of companies in that sector failed to meet the manager's "minimum standards and most did not have sufficiently ambitious emissions targets."
The banking, insurance and property sectors were also singled out as "lagging" when it comes to setting and meeting net zero targets.
Improvements in Asia
The asset manager said that, while UK and France still lead the pack, 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.