Which key ESG investment themes are in focus in 2024?
Nancy Kilpatrick: Since the Charity Commission 14 revisions came in, charities have been prompted to refocus on their mission and what they want to achieve when it comes to social purpose. This not only feeds into how they operate day-to-day but also into what they do with investments.
Almost all the charities we speak to want to have environmental, social and governance (ESG) investing at the core of their portfolio, but there has been a shift recently towards strategies that are more aligned and have a direct link to a specific purpose. As charities look at their own mission statement and how they want to structure themselves, they also look at how to reflect that in their investment portfolios.
In our view, the main areas that charities are focusing on are nature, biodiversity and climate change. Our clients are asking us to strengthen those areas. Some larger clients that have more ability to support small amounts of illiquidity are looking at things such as real assets and private assets to invest directly in the economy.
ESG is ever evolving and charities are looking more at the extent to which their investments are really impacting society for good and reflecting their values. There is much more targeted thinking about how they can make an impact with their portfolios.
How can engagement-led investing help address climate change?
Laura Brown: Many clients have been looking at incorporating climate-related objectives into their portfolios for many years now. That often involves incorporating a component of decarbonisation into the strategy and obviously stewardship has been a core part of that approach. But decarbonising the portfolio doesn’t necessarily decarbonise the real world and charities are starting to ask what more they can do.
With this in mind, we have partnered with Swedish pension provider AP7 to develop a new engagement strategy that focuses on a group of companies that traditional decarbonisation strategies might tilt away from. We have been looking at companies that are currently laggards in relation to the climate transition, but have the potential to be leaders in our view. This engagement-led investing is based on having in-depth discussions with those companies around what we think they could be doing to improve in terms of real-world emissions, while also seeking to unlock shareholder value. It is a natural evolution of the stewardship and engagement that we do but takes it to the next level.
Often the narrative around profitability and tackling climate change likens it to a tug of war, with team profit versus team ESG. When things are going well, ESG gets more slack, but when profits are down, it pulls the other way with people more worried about incorporating ESG aspects into company strategy. Our approach is to try to cut that rope and show that there are many opportunities that are positively aligned with the climate outcomes that we want, while simultaneously seeking to help improve a company’s value and profits in the long term.
How does your engagement strategy impact on the way companies operate?
LB: One of the potential benefits of this strategy is that it is focused on only around 50 companies but across a lot of different sectors, from finance, banking and insurance to food production. For every company that we hold in the portfolio we have a very clear perspective on what it is doing in terms of driving change and climate transition, what it is not doing well enough, and what we think it should be doing. We are clear on time-frame expectations, milestones, and the way that the strategy works. If companies don’t change how we want them to within an agreed time-frame, then we would disinvest and reinvest the capital elsewhere.
A key metric in our process is “engage-ability”. Our stewardship team looks to engage with all companies across the market and tries to improve standards overall, but we want to select companies where we think we have a decent chance of having success with that engagement. We focus on companies that listen to their stakeholders and are open to conversations around ESG.
What investment opportunities are there to help address UK challenges?
NK: We have been investing in the UK for a long time, just on our own balance sheet. Recently, we have started to open options to our clients to address issues such as the chronic shortage of affordable housing in the UK for key workers, hospital staff, and teachers.
We are also focusing on clean energy and new industries. By investing in start-up companies that are emerging via university spinouts and venture capital we are putting finances into the real economy. These are the areas that we can make accessible to clients.
It is important that you have asset owners and asset managers that can step in and bridge funding gaps in areas such as technology and sciences because they are a critical part of the economy that needs to be driven. This is where charities can support activity that impacts the wider socio-economic landscape.
An interview with Nancy Kilpatrick head of charities and Laura Brown head of client and sustainability solutions from LGIM.
Fast facts
- Top 10 charity manager
- £5.4bn* of charity assets
- 171,000 votes cast in 2022**
*LGIM internal data as at 31 December 2023
** LGIM internal data as at 31 December 2022
What we do
We are here to help organisations make the most efficient use of their investments. At a time when the call to the third sector is greater than ever, we partner with our clients to help them achieve their investment goals, whether that is long-term growth above inflation, income, seeking capital preservation or an element of all three. We pride ourselves on offering straightforward, cost-effective solutions to our clients. LGIM is building on its credentials as a responsible investor to seek to lead the asset management industry in addressing the dramatic challenges posed to by a rapidly changing world. We believe this activity is crucial to mitigate investment risks, capture opportunities and strengthen long-term returns for our clients.
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