The UK’s largest asset manager will encourage companies to tackle climate change and sell shares in those that do not
November 7, 2016 — The UK’s largest asset manager is to use its muscle as an investor to promote a green agenda by urging companies to tackle climate change and selling shares in those that do not.
In a move that echoes a growing belief among investors that climate change poses financial as well as environmental risks, Legal & General Investment Management launched the Future World Fund.
The fund, a small part of L&G’s £853bn assets under management, will invest in a new FTSE climate index of 3,000 stocks “tilted” towards companies that contribute to a low-carbon future.
As well as penalising oil and mining firms, the index excludes pure coal miners and companies that make controversial weapons such as cluster bombs and biological agents.
This means that LGIM – and other funds that start using the index – will allocate less of their clients’ cash to those industries.
LGIM’s other funds will continue to invest as normal, but the company will use its votes at company annual meetings to oppose the reappointment of chairmen who do not do enough to reduce carbon emissions.
It said the decision had been spurred by the Paris climate agreement, which yielded a legally binding accord aimed at reducing carbon emissions.
L&G has already won the backing of HSBC, which will use the Future World Fund as the default home for the £1.85bn of stocks in its £2.6bn UK defined-contribution pension scheme.
As well as tracking the FTSE climate index, the Future World Fund has singled out 84 stocks – in areas including oil, banking and mining – for special attention.
It will sell investments in these companies completely if they do not do their best to tackle climate change.
LGIM said it would raise climate concerns with senior executives, giving them a 12-month grace period to meet criteria seen as helping to tackle climate change.
“If they need to improve we’ll give them time to improve, but if there isn’t substantial improvement then we’ll divest,” said Mark Zinkula, chief executive of LGIM.
The asset manager is the latest big global institutional investor to add a moral dimension to its financial strategy.
French investment giant Axa announced last year it was selling coal assets in favour of renewable energy and this year moved to offload £1.5bn of tobacco investments.
“It’s a very powerful message we’re sending,” said LGIM’s head of sustainability and responsible investment strategy, Meryam Omi. “I don’t think a message like this has come from [stock] index managers before.”
The chancellor, Philip Hammond, said: “Three of Britain’s biggest companies have come together for the launch of this groundbreaking new fund, which is a testament to our status as the world’s leading financial centre.”
Environmental groups gave a cautious welcome to the decision but said LGIM could have gone further.
“What’s flowing from the Paris agreement is a range of responses from different parts of the economy and politics, all of which is good because it’s going in the right direction,” said Andrew Pendleton, head of campaigns at Friends of the Earth.
“But it would be better if we had a fund that actually provided people with the opportunity to vote with their feet and get out of fossil fuels altogether.
“We need to start taking our money out of these assets and that needs to happen more quickly and decisively than this fund is proposing.”
Mark Thompson, chief investment officer for HSBC’s UK pension scheme, said going any further would have limited the fund’s potential to effect change.
He pointed to HSBC’s defined-contribution scheme, which already includes an equities fund that invests only in green companies.
But pensioners have put just £16m into the Jupiter Sustainable and Responsible Equities fund.
He said L&G’s gentler approach would allow it to apply pressure on companies to go green “rather than being a niche fund that very few people will invest in”.
A survey conducted by LGIM found that 33% of people were not prepared to sacrifice any financial return for the sake of avoiding fossil fuel investment.
But LGIM stressed that its new Future World Fund could outperform traditional funds.
The fund will invest in firms in the FTSE’s new Climate Balanced Factor Index, which delivered a 15.94% return between September 2011 and October 2016.
This return meant it outperformed the 15.26% rise in the FTSE All World Index, which has no weighting based on climate criteria.