Join our community of smart investors

LGIM's naughty list lets off oil majors

Legal & General has updated its Climate Impact Pledge and the results show some major emitters still refuse to engage with investors on climate risks
June 21, 2019

London oil and gas companies are doing far more than their counterparts across the pond on monitoring emissions, according to Legal & General Investment Management (LGIM). This is despite Royal Dutch Shell (RDSB) and BP (BP.) operating in many of the same regions their North American competitors and BP spending $10.5bn (£8.4bn) on BHP’s onshore US assets last year.

LGIM’s sustainability-focused funds have divested ExxonMobil (US:XOM) because it refused to report emissions or set targets. The fund manager also took Occidental Petroleum (US:OXY) off its divestment list from last year despite its recent $38bn takeover of shale oil and gas producer Anadarko.

LGIM’s aim is to pressure major companies to track their emissions more closely, including those from indirect sources covered in scope 3 of the greenhouse gas protocols. They will also be encouraged to consider climate change mitigation when allocating capital, under threat of divestment from its Future World funds which have £5bn under management.

LGIM’s head of sustainability Meryam Omi said at a briefing the funds were looking for transparency around emissions and spending plans linked to the Paris accords on climate change. "[Companies] can't just keep buying assets in the hope that there will be growth in demand for commodities in terms of oil and gas,” she said. “We need to see their capex programmes are a lot more aligned, or resilient, to the 2 degree [global warming] scenario.”

LGIM operates on an ‘ex-growth’ model where a third of fossil fuel use is gone by 2040 as low-emission technologies become more widespread.   Last year, Occidental got the ‘name and shame’ treatment but pulled up its socks and now reports carbon emissions, with a plan to bring in targets by the end of the year. LGIM sold ExxonMobil because it refused to report emissions or set targets.

The tough capex choices faced by oil and gas companies was recently laid out by Berenberg in a report, which said the majors could face ruin by either refusing to move away from fossil fuels or overinvesting too quickly. The bank said being an “agile follower” would be less risky, and that Shell and Total’s current targets meant they would be major players in the renewables space within six years. Berenberg forecasts the two energy majors would have greater renewables capacity than all utility firms bar EDF (FRA:EDF) by 2025, which has 30 gigawatts in the pipeline. It has hold ratings Shell and ExxonMobil, and remains in the buyers' circle for Total (FRA:FP) and BP, the latter of which has been reluctant to commit major capex to low-carbon options - at least in relative terms. 

On the mining side, Rio Tinto (RIO) won plaudits from LGIM by selling out of coal mines, but its current coal power plant project at Oyu Tolgoi in Mongolia did not rate a mention. BHP (BHP) was also in the good books despite still owning coal mines, for saying it had “no appetite” for expanding coal exposure.

LGIM’s divestment threat is limited to its 14 Future World funds, which represent half a per cent of the fund’s assets under management.

Ms Omi said the divestment threat was not the only way to get companies to consider climate change risks. “The fact that all the assets are voting, is one of the biggest things,” she said. Ms Omi also said her team spent a “huge amount” of time trying to update client mandates to expand the sustainable investing beyond the Future World Funds.