Investment giant publishes detailed analysis of corporate giant's climate strategies, praising leading firms and vowing to vote against and divest from laggards
The 'carbon bubble' hypothesis is going mainstream. Legal & General Investment Management (LGIM) has today published the results of an extensive engagement effort designed to assess the climate strategies of the companies it invests in and pave the way for divestment from those firms that are failing to embrace climate action.
The company announced a Climate Impact Pledge in November 2016 in which it promised to help accelerate corporate progress to tackle climate change. Under the initiative LGIM initially wrote to 84 of the world's largest companies that had been identified as pivotal to meeting the goals of the Paris Agreement to request information on their climate strategies.
Building on parallel initiatives from LGIM to reduce its exposure to climate risks, the letters sought information that would allow the investor to score and rank firms against more than 50 indicators, including whether they have a corporate statement that formally recognises the impact of climate change, whether they are fully transparent on their carbon emissions, and whether the board composition is "diverse and robust enough to drive innovation and change".
The company today published the resulting rankings for the period from April 2017 to April 2018. It revealed 74 per cent of the 84 companies approached responded to letters, with 61 per cent undertaking meetings with LGIM.
"We believe these conversations contributed to a number of positive moves by firms including Toyota, Wells Fargo and Australia's Commonwealth Bank," LGIM said in a statement.
The report also confirmed a general improvement in corporate engagement with climate issues, detailing how median climate scores for US, Japanese, Australian, and South Korean companies all improved over the period, while oil and gas companies, utilities and auto-manufacturers also saw overall improvements in their scores.
LGIM singled out a number of companies for particular praise. For example, Spanish utility Iberdrola was hailed as a leader on public policy for its lobbying of the EU to adopt more ambitious emissions policies.
Similarly, oil giant Total was praised for its investments in clean energy and its commitment to developing a strategy that is compatible with the Paris Agreement, while banking powerhouse BNP Paribas was described as a leader on transparency for its disclosure of the carbon content of the power plants it finances and its plans to curb emissions from its projects in line with the global averages needed to reach the global 2C objective.
However, LGIM also took aim at those 'laggards' it accused of failing to come forward with credible climate strategies and confirmed it has divested a number of firms from its Future World index as a result of its research.
It said that as of the start of June the company's Future World funds no longer hold shares in China Construction Bank, Rosneft Oil, Japan Post Holdings, Occidental Petroleum, Dominion Energy, Subaru, Loblaw, and Sysco Corporation.
"LGIM will also vote against the re-election of the chair at these companies across LGIM's complete range of equity funds," the company said.
Meryam Omi, head of sustainability and responsible investment strategy at LGIM, said the company's climate strategy was primarily designed to protect long term returns for investors.
"Climate change is a significant issue for society and investors, and we have a limited amount time to act," Omi said. "Our role is to ensure companies in different industries transition successfully, and therefore we are committed to helping them do that with our Climate Impact Pledge.
"Our overriding goal is to help protect our clients' investments. We engage with companies to positively influence their governance, strategy and transparency. Divestment is a consequence but it is not the aim. We want to show that the transition to a low-carbon economy is possible and work with companies towards this goal."
The update from LGIM came just days after the Pope met with oil and gas industry executives to discuss the threat posed by the 'carbon bubble' and call on them to develop strategies that can tackle escalating climate risks.
It seems that after several years of discussion about the risks posed to investors by high carbon assets, mainstream investors are turning talk about carbon bubble risks into tangible action. It is a safe bet that plenty more investors will emulate LGIM and hit on a hybrid strategy that combines engagement and shareholder activism with divestment, especially as new reporting guidelines such as the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD) start to become more commonplace.
Listed companies have been warned. The next time a top investor writes asking about your climate strategy it would be advisable to respond.
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