Legal & General Investment Management has told its investee companies that it will vote against their pay packages if they fail to link a fifth of long-term incentives to reaching net zero.
The UK’s biggest investment manager has updated its approach to pay to align with its broader climate ambitions, warning firms in the most polluting sectors that: “To gain LGIM’s support for a new remuneration policy being put to shareholders from January 2025, we will expect to see climate targets within the long-term plan.”
“These targets should be in line with stated transition goals to reaching net zero and across the full value chain,” it continued, referring to scope 1, 2 and 3 emissions. Ideally, it added, the targets should be approved by the Science-based Targets initiative. Such targets should account for 20% of the overall long-term incentive plan award.
“We’re getting close to 2030, you can almost see it, and we want to get more companies to be more ambitious,” said Angeli Benham, a senior global ESG manager at LGIM. According to current climate science, reaching net zero by 2050 will require emissions reductions of 45% by the end of the decade.
“We wanted to signal this early, to give companies a chance to get their ducks in a row,” said Benham, who believes scope 3 emissions – those generated by products once they’ve been sold, or within supply chains, for example – will be the biggest challenge for portfolio companies seeking to meet the new requirements.
“A lot of companies have got scope 1 and 2 completely nailed, but are still struggling with scope 3.”
Scope 3 emissions are particularly significant for companies in industries such as oil and gas, where the lion’s share of greenhouse gas emissions are released during the consumption of the product rather than its production.
LGIM’s new rules apply to companies in autos, apparel, aviation, banks, cement, chemicals, food, insurance, mining, oil and gas, real estate investment trusts, shipping, steel, technology, telecoms and utilities.
For oil and gas companies, the asset manager said it would be likely to oppose pay packages tied to fossil fuel production volumes. It said that measures such as reserve replacement ratios or production targets “risk incentivising overinvestment at a time when growth in demand seems increasingly uncertain and should therefore be avoided”.
Instead, LGIM wants companies to opt for metrics around shareholder returns or balance sheet strength.
The remuneration policy also reiterates and strengthens LGIM’s expectations on other ESG topics, such as health & safety, diversity and staff retention.