Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Why our Climate Impact Pledge isn’t just about fossil fuels

As we publish the annual results of our Climate Impact Pledge, we explain why we must press every company – not just those in the energy sector – to meet this era-defining challenge.

Earlier this month, Sir John Kingman – our chair at Legal & General – and I were fortunate enough to be with Pope Francis when he warned of the global ‘climate emergency’ and made the case for a ‘radical energy transition’ to avert the ‘catastrophic’ risks of the earth warming by more than 1.5°C.

In the UK, Legal & General called for a policy of net zero carbon emissions by 2050, which was then adopted. Indeed, for several years now, we have been advocating for ambitious regulations and increasing the pressure on companies globally to reveal how they will hasten the transition to a low-carbon economy. In that spirit, we are pleased to publish today the second annual results of our Climate Impact Pledge.

Under our Climate Impact Pledge, we not only assess and score over 80 of the world’s largest companies; we engage with a result in mind. Faced with this generational challenge, we can’t afford to talk forever. Our engagement is different. It is consequential. To emphasise our seriousness, within our Future World funds we divest from those companies that fail to demonstrate sufficient action and across all other funds in which we hold voting rights in those businesses we will vote against company resolutions.

It’s not all oil

As you may expect, a large part of this work relates to sectors such as oil and gas, mining, electric utilities, and autos. Our full report sets out our engagement across those areas in more detail, but in this blog I wanted to highlight some sectors whose climate impact may be underestimated by investors.

Consider food retailers, for example. Even though the Intergovernmental Panel on Climate Change (IPCC) points out that almost a quarter of the world’s emissions derive from agriculture, land use and deforestation, food retailers have received comparably little public attention regarding their role in solving climate issues.

Those companies have an important role to play in mitigating their use of resources that are aggravating deforestation (such as palm oil, soy, and cattle), and in promoting sustainable land use and an efficient supply chain that doesn’t waste food. In short, we want the companies in this sector to demonstrate that they understand where their food sources come from and manage their whole value chain. They are, after all, at the top of the food supply chain. 

Another sector that is often overlooked is financials, namely banks and insurance companies. They may be directly responsible for only a small proportion of the world’s emissions, but their lending, corporate facilitation, insurance, and asset-management activities are integral to speeding up or delaying the move to a low-carbon economy.

We therefore expect financial companies to consider climate change in their business strategies, with particular regard to the risks it poses. Climate change ‘stress tests’ should be an essential component of prudent risk management for financial businesses, as a growing number of regulators now recognise.

Looking ahead, we would like more of these companies to improve their reporting on green revenues, so investors can assess the extent to which they represent a meaningful departure from a business-as-usual trajectory.

We have an enormous opportunity to contribute to the low-carbon transition. With technologies and regulations as our tail wind, all sectors including financials and food retailers should be capitalising and leading on this opportunity set. We are starting to hear such rhetoric from these companies, but remain concerned that the speed of change is not fast enough.

Engage for an outcome

We developed the Climate Impact Pledge to create positive change where it can have the greatest impact. In three years of engaging with companies on this pledge, we have seen that we can really make a difference in the biggest companies in the world. Companies tell us that what we say and do matter because we do what we say. This is not just more talk.

Clients are asking us what we can do for them to address something as big as climate change. Well, we will speak not only to the oil majors but also the supermarkets and high-street banks on their behalf. We will do everything we can to bring about positive outcomes because this matters both for our investments and for our future.

Please click here for the full annual results of our Climate Impact Pledge, including details of divestment candidates and companies that have demonstrated progress over the past year.

You can also find LGIM and L&G’s Task Force on Climate-related Financial Disclosures (TCFD) report regarding climate risk by clicking here.