LGIM net zero carbon emissions

Pepper a text with accounting words like ‘net’ and ‘gross’, and many readers will find themselves explicably sleepy. It is all the more remarkable, then, that public concern with climate change has propelled ‘net zero’. Chosen as one of Oxford Dictionary’s words of the year, this term from the arcana of climate accounting has become a rallying point for policymakers and a battleground for activists. 

Net zero what?

Successfully limiting climate change requires that we emit no more planet-warming greenhouse gases into the atmosphere than the Earth can absorb – a balancing point known as net zero emissions[1]. This does not mean that emissions have to be zero at all places, as some are inevitable. It only means that our carbon-absorbing assets (be they natural - trees, soils, oceans – or artificial – such as technologies for carbon capture) must, overall, match our carbon-emitting liabilities (from industry, agriculture, energy and other activities).

Net zero – when?

When the landmark Paris Agreement was signed in 2015, it was a document high in ambition – to limit climate change to well below 2°C – but low on key details (emissions targets ‘in the second half of this century’). Since then, a consensus has formed that reaching net zero emissions by 2050 or earlier provides a much safer chance of meeting the Paris goals. This timeline is now increasingly reflected in legislation around the world, including in the UK, with a growing number of companies setting aligned targets.

Net zero – who?

Investors can play a key role in facilitating capital flows to meet these goals, and capital has to match up with the commitments made by companies, cities and countries as part of a Race to Zero. This is why at LGIM, we worked with Generation Investment, IIGCC[2] and other investors to develop a common framework and launched the Net Zero Asset Manager Initiative on 11 December 2020, the eve of Paris Agreement’s five-year anniversary. We were a founding signatory, as part of 30 asset managers with a combined $9 trillion in assets that participated in the initiative. Member signatories will:

• Work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net-zero emissions by 2050 or sooner across all assets under management
• Set, review and aim to increase over time a target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner

LGIM has a fiduciary responsibility to our clients so cannot place a blanket commitment on assets on their behalf. Fortunately, a growing number of asset owners – including Legal & General Group, our parent company – have already set net zero targets for their assets, and our ambition is to help accelerate this. This is not a commitment to blanket divestment. Rather, it is a commitment to help decarbonise portfolios over time, where clients have given us the mandate to do so, and to develop the analytics – such as our Destination@Risk modeling – and the investment solutions that will facilitate this.

Engage for change

We also recognise that achieving net-zero emissions globally is a very demanding target, which will require action not just from investors, but crucially from companies and governments, too. Without progress in the real economy, unilateral steps by investors to reduce the carbon associated with their portfolios will not trigger the necessary changes.[3]

Meanwhile, through our Climate Impact Pledge engagement programme, we will continue to encourage the companies we invest in to step up on sustainability. And we are holding accountable many of the world’s largest companies on their progress towards net zero, including through the creation of public climate ratings linked to our engagement and voting and publication of net zero expectations in 15 key sectors.

LGIM will also keep engaging with governments, our peers and civil society to push for the necessary policies to ‘green’ the global economy, and to help further develop the emerging global frameworks that aim to create standards for net-zero-aligned investing.

Next year in Glasgow, at the COP26 climate change conference, policymakers are set to announce bolder policies to set the world on a course towards net zero. This will be a huge undertaking, but with innovation and collaboration we can rise to the challenge. Our ambition is to be at the heart of these efforts.

[1] As the main driver of man-made climate change, carbon dioxide (CO2) receives most of the public attention, but there are also other, more potent greenhouse gases (GHGs) such as methane (CH4). As GHGs are standardly reported in tons of CO2-equivalent, and most of them also contain carbon in their chemical formula, ‘net zero carbon’ is sometimes used, including in this blog to refer interchangeably to all GHGs. Strictly speaking though, there are other GHGs like nitrous oxide and sulphur hexafluoride that contain no carbon.

[2] Institutional investor Group on Climate Change

[3] This is also one of the reasons why the net zero commitment is not a commitment to purchase carbon credits to ‘offset’ all the emissions of individual portfolios; using all the tools at our disposal to push for real change takes priority.