PLSA exclusive: LGIM bets big on ‘engagement with consequences’

As PLSA’s 2023 investment conference is drawing to a close today, Net Zero Investor reflects on a busy week during which a range of speakers and panels touched on various topics and issues.

On the last day of the event, this publication checked in with Stephen Beer, senior manager for sustainability and responsible Investment at LGIM, one of Europe’s largest asset managers and a major global investor, with assets under management of around $1.4 trillion, serving a wide range of global clients, including multiple large UK pension schemes.

At this week’s conference in Edinburgh, investment opportunities in renewables were widely discussed and even hailed by some as the next frontier in net zero investments. Equally, biodiversity is firmly on the radar of many pension funds and their investment managers. Do you recognise that trend?

What is increasingly clear is the link between biodiversity and mitigating climate change. The promotion of biodiversity helps reduce systemic risks - the degradation of oceans, forests and other ecosystems undermines nature’s ability to provide many goods that societies and economies need to thrive.

With all investments, it is important to get the objectives right including expectations of financial returns and risks. We want all companies to operate consistently with the transition to a net zero economy.

To stick with those companies for a second: pro-active stewardship was one of the main topics this week. So how do you go about this, how do you help asset owners to find the right balance?

We are a ‘universal owner’ on behalf of our clients, meaning we are concerned with reducing systemic risks across markets as well as navigating company specific risks. We believe responsible investing is essential to improve long-term returns, unearth opportunities and mitigate risks by fostering sustainable markets and economies.

When we allocate capital, we conduct extensive research into potential environmental and societal outcomes. We see responsible investing as the incorporation of ESG considerations into investment decisions, alongside engagement with companies, regulators and policymakers, to generate sustainable outcomes. We believe ESG factors are financially material, albeit not all to the same degree.

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.

Let’s pause there for a second. Engagement with consequences, how does this work in practical terms at LGIM?

We recognise that change is a journey that is typically delivered in steps - not leaps. Constructive engagement with companies and policymakers is the best way to deliver this long-term, systemic change. Indeed, we celebrate those that take action to improve ESG outcomes. But 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.

Divestment is often a blunt and often ineffective tool, which may result in investors overlooking the problem they are trying to solve.

In order to get to that level of engagement, and a better outcome, as you put it, what is the stewardship approach underpinning such policies?

Yes, we shape our Investment Stewardship approach around six key themes: climate, nature, people, health, technology, and governance. Each one poses systemic opportunities and risks and matters to our clients. What’s more, we believe that these are areas where we can effect real-world change and can help safeguard our clients’ assets. Each theme has sub themes, so for example, under the climate theme we look at mitigation, adaptation, accounting and just transition.

Based on the themes you just mentioned, let’s zoom out for a second. How do you see the role of asset owners in influencing or steering the net zero agenda?

Asset owners have a vital role to play in the transition to net zero. A warming world increases a variety of systemic and specific risks that can affect future returns. When an asset owner has a firm view about the need for a net zero world and the risks attached to climate change, it makes sense for it to review its financial objectives and ensure its asset managers are aligned. That is one reason why it is important to us to have ongoing dialogues with our clients about net zero objectives and expectations.

As we get closer, the nature of the debates about transition is changing. Decisions faced by companies can become harder, and more urgent. A company has to properly assess climate change risks with immediate implications for its business model. Transparency is important. In this way, society can discuss facts rather than conjecture when it comes to what action is being taken on climate change.