Climate Impact Pledge 2024 – setting baseline expectations

There has never been a more important moment to address the challenges created by climate change. We believe this is a critical issue for our clients’ portfolios. With the Paris Agreement’s objective to pursue “efforts to limit the temperature increase to 1.5C above pre-industrial levels” at risk, net-zero deadlines have only become more pressing. We are in a phase of hard choices and what once seemed a longer-term problem is now not so far away.

LGIM encourages companies to tackle climate change, and transition to a low-carbon economy, through our Climate Impact Pledge (CIP) engagement programme. As part of the CIP, we assess and engage with companies in 20 ‘climate-critical’[1] sectors.

Our quantitative, data-driven, assessment analyses over 5,000 companies across a range of metrics, based on the Task Force on Climate-Related Financial Disclosures (TCFD) framework. Where companies fail to meet our minimum standards, we may vote against the re-election of the chair of their board.

We engage directly with over 100 companies that we believe have the potential to be ‘dial-movers’ in their sectors; our view is that if they change others may follow.

This year, we have made some changes to our quantitative assessment and voting policy by putting a spotlight on companies’ methane emissions disclosure and new investments in thermal coal.

Setting baseline expectations for emission-intensive sectors

From this year, we have introduced baseline expectations, absolute minimum standards, that will drive our climate-related voting for emission-intensive sectors. If a company fails to meet these, we will apply a vote against the re-election of the chair of its board where possible.

These baseline expectations apply to the following sectors:

We expect oil and gas companies to have disclosed their methane emissions at least once over the past three years.[4] This is because methane, while shorter-lived in the atmosphere than carbon dioxide, is a more potent greenhouse gas. Therefore, we believe it should be a company’s responsibility to calculate and manage, yet methane disclosure globally can be much improved.

We expect mining companies and electric utilities to refrain from making new investments in thermal coal mining or power generation expansion..[6]

Refreshing minimum standards

The range of data points by which we rate companies varies according to sector. Some data points are also considered minimum standards. We identify a company for vote sanctions when it does not meet our minimum standards sufficiently, depending on which region it is listed in and whether it is above the median market cap size of its sector.

This year we have added new minimum standards to ensure alignment with our expectations in our sector guides on which our direct engagement is based. New additions include assessment of climate lobbying activities for all companies and methane emissions reduction trajectory for oil and gas companies, among other metrics including sustainable agriculture and recycling of materials.

Until now, our threshold for Japanese companies has been limited to meeting one minimum standard. With the rate of progress in Japan having accelerated over the past few years, this year we raised our expectation of the number of minimum standards to be met to three.

Engagement and transparency

We publish our quantitative assessments and methodology online, so anyone can see how we rate a company. We publish sector guides, outlining our main engagement questions and our ‘red lines’. When we vote at annual general meetings, we disclose our votes with rationales shortly afterwards.

Our CIP report last year provided more detailed information on our engagements and how we had expanded the scope and depth of the pledge.

Transparency and reporting are not only important and useful for our clients; they are part of the CIP approach itself. Companies can see how we assess them and know in advance our expectations and key questions we are likely to ask.

 The important role of engagement

Companies doing too little today risk damaging the credibility of promises to reduce emissions in the years to come. We believe they are potentially increasing risk not only to themselves, but to the global economy and societies worldwide, contributing to the risk of a more disruptive and costly transition than might be possible. They may also risk getting left behind by new technological advances as the transition accelerates in some sectors. That is why we believe investor engagement with consequences, such as through LGIM’s Climate Impact Pledge, is so important.

[1] We focus on climate-critical sectors, which are responsible for the most global greenhouse gas emissions from listed companies and/or vital to climate transition at scale, as well as the most carbon-intensive sectors in LGIM portfolios.

[2] CIP Oil & Gas sector except Oil & Gas refining and marketing sub-industry.

[3] CIP Electric Utilities and CIP Multi-utilities sectors except water and gas utilities sub-industries.

[4] Data sourced from Bloomberg.

[5] Data sourced from Urgewald.

[6] International Energy Agency Net Zero Emissions scenario (2023)