Why we’ve increased our focus on demand-side engagement

Companies that supply fossil fuels have been the subject of intense engagement from investors for several years now. At LGIM, we have demonstrated our commitment to achieving the goals of the Paris Agreement by escalating engagements at some of these supply-side companies. Examples include the management-backed shareholder resolution we co-filed with BP* in 2019, asking the company to set out a business strategy consistent with the Paris Agreement, as well as more recent resolutions regarding thermal coal production pathways with Glencore*, and asset retirement obligations with Exxon*.

Supply-side engagement is important to ensure that we meet the goals of the Paris Agreement, and will remain so going forward. However, it’s clear that if we are to have an orderly transition to net-zero emissions by 2050, companies that rely on fossil fuels (‘demand-side’ companies) also need to decarbonise, and fast.

Lessons from the energy crisis

The energy crisis that started in 2022 demonstrated what happens when the supply of energy is sharply reduced amid persistent demand. As such, to avoid future price spikes and supply gluts, future decreases in fossil fuel supply must be accompanied by a decrease in demand and an increase in low-carbon alternatives.

The IEA’s latest World Energy Outlook reinforces this reasoning. According to its net-zero emissions scenario, to keep alive the goal of limiting the global average temperature increase to 1.5C by 2100, fossil fuel demand needs to decrease by 25% by 2030 from 2022 levels.¹ Furthermore, the scenario states that this must be accompanied by a tripling of renewable installations (as well as investment in clean energy investment in emerging and developing economies), a doubling of energy-intensity improvements, and a reduction in methane emissions from fossil fuel operations of 75%.

Engagement approach

We are engaging with companies on the demand side of the economy already. Our Climate Impact Pledge drives direct engagement with over 100 companies across 20 climate-critical sectors, as well as the quantitative assessment of over 5,000 companies. Within our engagements, we seek to understand and address the barriers for companies in their decarbonisation efforts, particularly in ‘hard-to-abate’ sectors. Furthermore, we demonstrate a model of engagement with consequences, and our Climate Impact Pledge report showcases how this can drive up market standards.

We are also a lead investor at Finnish utility Fortum* via the Climate Action 100+ (CA100+) initiative². Fortum is a demand-side company that, throughout our engagement, has committed to exit all coal-based electricity generation by 2027 and set a 1.5C science-based target.³

This year, in line with our aim to increase our engagement with companies in demand-side sectors, we have also become co-lead investor at Hindalco* within the Institutional Investors Group on Climate Change’s Net Zero Engagement Initiative (NZEI).

In doing so, we hope to build upon our Climate Impact Pledge engagement with the company, to ensure that Hindalco decarbonises at the rate needed to thrive in a net-zero world.

We will continue to engage with both supply- and demand-side sectors of the economy, with an increased focus on escalating our engagements on demand-side companies that don’t meet our minimum expectations.

*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Sources

1. World Energy Outlook, IEA, October 2023 [p.45]

2. Within both the CA100+ initiative and IIGCCs Net Zero Engagement initiative, being a lead or co-lead investor does not mean that we are the majority shareholder. It means that we lead the engagement with the company within the respective initiative.

3. Sustainability 2022, Fortum, 2023 [p.2]