22 August 2023

Transition plan, the end of the beginning at L&G

Adrian Chapman, head of group climate investment oversight at Legal & General, discusses the group's first transition plan, how it received the backing of shareholders at this year's AGM, and the intricacies of public communication on the plan.

Playing devil's advocate, when we talk about transition plans, it's basically measuring the current footprint, engaging with high emitters and potentially exclusion from the portfolio – so, why the need for long reports?

I'm glad to hear you think it reads simply, which would suggest we communicated in a simple way, which is encouraging.

When we started our journey, we set our long-term ambition to be net-zero by 2050, back in 2019. Which is a great ambition, but it's nothing without a trajectory to get there, otherwise, we do nothing until 2049 and then suddenly have to scramble.

Building on that long-term ambition, you then set out interim steps along the way, to give you a trajectory in reaching that ambition, followed by the range of actions we are already taking or intend to take in the future to achieve these milestones.

At L&G we've broken down our net-zero commitment into three pillars.

Pillar one: how we invest our assets, where we retain the investment risk, both through reducing the carbon intensity of our financed emissions and through investing in the transition. That's around £80bn worth of assets.

The second pillar is how we influence as a large asset manager. I mentioned that we have roughly £80bn worth of our own investments, but LGIM manages £1.2trn of assets on behalf of its clients. With our larger scale as an investment manager, we influence in two ways: we can influence our clients to decarbonise their assets through the products that we offer, but we can also influence the global corporate universe through exercising our stewardship and voting rights and engaging with the real economy.

The third pillar is how we operate as a business and, in technical terms, fits our Scope 1, 2 and 3 (non-financed) emissions. We do that in two ways: firstly, how we operate as a business; our offices, our facilities, our travel, and secondly decarbonizing the businesses we control, being a large commercial property landlord and running a number of housebuilding businesses.

Within each of those pillars, we have then looked for interim steps to help us achieve our net-zero commitment by 2050.

So, what is the purpose of reporting this in a transition plan to an external audience?

We felt that those three pillars explain to the outside world how all of our activities within our business can contribute to our net-zero ambition.

And, in fact, through our successful shareholders' vote on our transition plan at this year's AGM, we have received support that we demonstrated the plan covers Legal General group-wide activities. We don't focus on one particular area and ignore any others. It's meant to be a top-down approach that's all-encompassing, which we think is very important.

And the transition plan audience is only your shareholders?

It is for a number of stakeholders. Our shareholders are the primary readers of the transition plan. With such a large commitment to net-zero, we believe it's right that our shareholders support the steps that we've put in place to achieve that ambition and therefore we wanted to put the transition plan to our shareholder vote. So, they are the primary readers.

But we acknowledge that it's a public document and we wanted to make that information available not just to our existing shareholders, but any potential future shareholders and indeed any other stakeholder, such as customers or regulators, who would be interested in our approach. We wanted to provide that transparency within our plan.

It's a document which complements our annual Climate report, so we intend to review this transition every three years as a forward-looking planning document, and then we report our progress against that plan within our climate report each year.

Obviously the transition plan is a communication document, all the thinking and the action has been done internally and then you put it into a document that is made public, that must come with a set of challenges? What are they?

The fact that we have been reporting in line with TCFD recommendations on these issues for five years now has eased some of those challenges, which we might have had if it had been the first publication about our approach to climate.

For example, our coal policy has been in the climate report for a while, and so has a number of the targets we've set. So, I think we've broken down some of these communication challenges already.

But it was a different focus of attention with the transition plan, and really it was about making the different timelines clear to the reader, and standardising the different steps that we're embedding across the different pillars. So, the formatting of the report is something we thought about quite a lot to get it into a plan format, as opposed to a progress report.

Are there any particular messages in the plan that you were particularly keen to communicate?

Setting the targets that underline the plan comes with a set of challenges, so we were really pleased this year to report in both the climate report on our transition plan that our targets have been approved by the Science Based Targets initiative. That's a really important step for us, just to demonstrate that our ambition has that external verification, it is not just our interpretation of the science.

And what message did you want your shareholders to get?

We wanted to ensure support of our approach: Are our commitments ambitious enough? Are they too ambitious? Where does that fit in terms of where our shareholders would like us to be? Does the plan ensure complete coverage of L&G Group? We also wanted to call out that climate change is not just a risk point: we see business opportunity in the net-zero transition, as well.

You mentioned the challenge of thinking about the format, are you part of any initiative that helped with that?

Yes, LGIM is on the Steering Group of the UK Transition Plan Task Force, and that certainly helped our thinking. LGIM is also part of GFANZ Principles Group, which had set out their thoughts on generating transition plans. Both of those definitely fed into the thinking and the discussion we had on formatting the plan.

Will the format and the way the plan is communicated evolve, considering we are moving to mandatory sustainability disclosures with the ISSB and its UK version, the so-called sustainability disclosure requirements (SDRs)?

Our climate report, which is annual, is where we report our performance and that will see year-on-year changes. Our transition plan is really our strategy, so that will be more stable. There will clearly be modifications as global economic events occur.

We are aware of the ISSB standards, and readying ourselves for them.

Did you get any 'qualitative' feedback from shareholders, beyond the 'quantitative' one, if we can put it that way, of passing the vote?

We did talk to our shareholders in the run up to releasing the plan, who gave us useful feedback on how to make the plan clear to readers, but were very supportive of our approach. In that discussion, it's clear that a lot of our shareholders are also learning this as they develop their own organisations' transition plans as well.

As I said, most of the conversation was centered around whether the plan covered the business as a whole, and if our approach was in line with the science, but also the reliance we have for the global economy to move in that direction as well. Inevitably you have small divergences between shareholders' policies, which is to be expected, but broadly it is aligned.

We put some good work into it and we were very pleased with the shareholder support and the SBTi verification of our targets. But we also had to make the point that this is the end of the beginning, now we have to execute the plan and meet our targets.

Legal & General
Adrian Chapman
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