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Open Forum questions and answers

Answers to some of the questions from the Open Forum on 26 October 2020.

Published on: 8 February 2021

Last updated: 8 February 2021

Questions on sustainable investments

Q. Issy - How is the council planning to divest its pension fund?

A. We have not made a formal commitment to simply divesting from all fossil fuel companies. The Pension Fund has instead taken a view towards reducing its overall carbon footprint. Whilst the council’s active equity managers do not invest in fossil fuel companies, the Fund’s passive equity mandate with Legal and General does currently have a small amount of Fossil Fuel exposure.

This fund is structured to tilt portfolio construction to better overall environmental, social and governance factors, rather than simply cut carbon emissions alone. Despite this, the Fund has half the carbon emissions of the standard index and one third the fossil fuel reserves. The Fund has committed £80m to invest in renewable energy infrastructure to offset emissions elsewhere and contribute on the journey to carbon neutrality.

The Future World Global Equity Index Fund has index weights that are ‘tilted’ according to ESG scores to allocate assets towards companies that score well from an ESG perspective, and away from low-scoring companies. The funds go further than just congratulating the companies with the highest ESG scores. The scores are generated from public information and are aligned with LGIM’s engagement and voting activities. They will also be made public, creating a powerful incentive for companies to improve their behaviour.

Although there are no wholesale exclusions in the FWF range, there are some targeted exclusions as outline below;
The Future World Protection List has been specifically developed for the Future World fund range.

Companies are incorporated into the list if they fail to meet minimum standards of globally accepted business practices. Across the LGIM-designed Future World funds, companies will not be held or exposure to them will be significantly reduced should they fail to meet the minimum standards. The Future World Protection List includes companies which meet any of the following criteria:

  • involvement in the manufacture and production of controversial weapons
  • pure coal miners – companies solely involved in the extraction of coal
  • perennial violators of the United Nations Global Compact, an initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies

The Future World Protection List that we have in place highlight that the exclusions are meaningful but does not significantly impact the portfolio as a whole. For example, pure coal is a very small percentage of the market.

In addition, through LGIM’s Climate Impact Pledge, we work directly with the companies in which we invest, to bring about positive change. The companies are quantitatively scored and qualitatively analysed. The scores are used to rank companies against each other and their peers, based on a set of key metrics which are linked to the robustness of their governance and climate change strategies.

The Corporate Governance team engages directly with all the companies to help them score better over time, hence assisting in the process of building a resilient strategy in the face of policy and technical changes. In order to ensure the engagements carried out are effective, following a sustained period of engagement, companies that do not meet our minimum standards for strategy, governance and transparency will be disinvested from all funds in LGIM’s Future World range.

Companies that get removed via the pledge can make their way back in, for example two companies did from last year to this year. The Climate Impact Pledge is LGIM’s commitment to engage with the world’s largest companies in key six sectors which play a vital role in the transition to a low carbon economy.