Putting our money where its mouth is

When it comes to adopting environmental , social and governance tilts into funds, L&G and their investment arm LGIM have been to the fore. First they launched a global equity fund with bias’ to ESG and more recently a green version of their multi-asset-fund (MAF).

Now they have taken a more radical step , announcing that they will be swapping out the  conventionally managed defaults for these greener alternatives, including defaults for L&G Mastertrust and contract-based schemes, representing around 3.3 million members.

In addition, L&G is making it possible for savers in these funds to vote on issues relating to individual stocks through software provided by start-up Tumelo.

If savers want to understand the issues in greater detail, they can go to the LGIM website and find out what LGIM think of 1000 companies they research.

These advances are part of what LGIM calls its annual Climate Impact Pledge and it means that the default position for L&G savers is to now invest in funds that are managed with a firm focus on ESG. This is indeed making our money matter and is thoroughly to be applauded.

Not a moment too soon!

I have been complaining for three years that while LGIM talked the talk, the life company that provides the policies and the trust structure we invest into , didn’t walk the walk. My moaning has been particularly to their IGC and Trustees and I am glad that what the provider says and does is now aligned.

Value for money considerations

There is an extra cost to this extra management, a cost that I have in the past queried. I wrote to Emma Douglas (L&G head of workplace) yesterday and got an immediate and frank reply

We are adopting the new climate impact pledge across all the defaults, including the Pathway Funds, the Multi-Asset Funds and the Retirement Multi-Asset Fund. The fees and fund management objectives remain the same across all the funds. The Future World Multi-Asset Fund is still at 16bps as it also incorporates tilting, taking into account a full range of E,S & G scores. This differentiates it from the main Multi-Asset Fund.

So if you are in an L&G workplace pension and saving into a default , the chances are that the cost of your fund management (not your administration) will increase from 0.13% to 0.16%. This cost is being directly passed on to savers.

At the time when I switched my investments from standard to green equity funds with L&G , I asked about the extra value I would be getting for the money and met with the fund manager Martin Dietz. I could only complete due diligence for myself, but I decided to move my money based on my personal assessment of the value I would be getting for the extra money.

I hope that L&G will make it clear to policyholders and members of the master trust just why prices are going up and make sure they have the option to opt back into the less green alternatives.

There will be some who will argue that the integration of ESG into workplace pensions should not be at the saver’s expense. We will see over time whether there is convergence in pricing between the green and non-green versions and whether this results in a levelling up or down in costs.

How this moves the dial

L&G are not the first to revamp their workplace pension funds. Earlier in the month, Aviva made the bold move of announcing their default investment would be carbon-neutral by 2050. Nest too has radically overhauled its target-dated range of defaults to ensure it will be reporting well on TCFD and delivering returns adjusted for the ESG risks.

If this sounds a little technical , bear with. It is important that we understand that Government initiatives that require large workplace pensions to bare their green credentials bear fruit. It is important to acknowledge the pressure being brought on large providers historically by Share Action, Minerva and PIRC and more recently by consumerist organizations, notably Make my Money Matters and Extinction Rebellion.

Those organisations that adapt and adopt to the serious issues that ESG presents, deserve our immediate recognition and I hope that L&G, Aviva and Nest are commercially advantaged for being first movers. If others (and there is clearly a move among others) follow, that is good too.

Positive action, as has been taken by L&G and LGIM – should be rewarded just as much as negative behavior with our wrath. By way of an example I include the list of leaders and laggards , LGIM are identifying from their research.

The leaders and laggards

ExxonMobil, Hormel, Kroger, Sysco, Rosneft Oil, KEPCO, Loblaw, MetLife, Japan Post Holdings and China Construction Bank will remain on LGIM’s exclusion list.

Companies and sectors discussed positively in the report include:

 Utilities continuing to have the highest score, reflecting the relentless progress of renewable energy. The charge to phase out coal – led by progressive European utilities such as Enel – is now reverberating in markets that had previously resisted change, including some regulated utilities in the US and in South-East Asia.

 Automakers pursuing the rapid development of electric vehicles.

 The mining sector is increasingly embracing its role as an enabler of a mineral-intensive low carbon transition – with BHP announcing plans to phase out their thermal coal assets and partnerships to support the decarbonization of steel and shipping.

 Banks and insurance companies have made notable commitments including Commonwealth Bank of Australia’s and Chubb’s vow to halt coal financing and Lloyds Banking Group’s plans to halve the carbon it finances over the next decade.

 In the oil and gas sector, all European oil majors have announced net-zero emissions targets. These include not just their operations, but also the use of their products (by far the largest source of emissions for the industry), with BP planning to curb oil and gas production significantly, broadly in line with global climate targets. Such moves mark a remarkable shift for an industry that only a few years ago was resolutely opposed to setting carbon targets

 Food retail – the only sector to have declined year-on-year, food retail remains an area of concern, as its scores for verification of greenhouse gas (GHG) data, governance and targets have declined. LGIM has been engaging with food companies about the role of deforestation in their supply chain and the transition of product portfolios towards lower-impact alternatives. However, there are a variety of approaches taken in the industry, with companies such as
Nestlé modelling the impact of a changing climate on their coffee, cereals and dairy production and General Mills bringing regenerative, carbon-storing agriculture techniques in
its supply chain.

Legal & General Group Plc, LGIM’s parent company, has also pledged to align its balance sheet and overall business with the 1.5°C temperature goal of the Paris Agreement
.