Responsible investing webinar - Autumn 2023

An introduction to responsible investing

Slide 1 - An introduction to responsible investing

Welcome and introductions.

Housekeeping for the webinar.

Slide 2 - Important information

Risk warnings:

• This is a general education presentation and does not represent financial advice
• It’s based on the 2023/2024 tax year
• The law, tax rates and any allowances may change in the future
• The value of your investment will go up and down. It isn’t guaranteed, so you may get back less than you put in

Most of the activity described in this presentation is carried out by Legal & General Investment Management (referred to as LGIM), the investment management business of Legal & General. LGIM manages your funds and makes the day-to-day investment decisions.

All our funds are managed by professional fund managers but some of the funds available to you are not managed by fund managers at Legal & General and LGIM. External fund managers may take a different approach to responsible investing.

Throughout this presentation, we use companies as examples of the action we take. The issues highlighted are not exclusive to them.

Given all the recent economic and political uncertainty, we've created a dedicated 'Managing your savings in uncertain times' webpage, where you can find out more information about what this might mean for your retirement savings, which you can access using the QR code.

Slide 3 - What are we going to cover today?

The topic for today’s webinar is responsible investing.

During this presentation, we’re going to look at:

• what we mean by responsible investing
• Legal & General's approach
• what it means for you and your savings
• where you can go to find out more

Slide 4 - What is responsible investing?

What it means for the way in which your pension savings are invested

As a pension saver, you are an investor. When you put your money into your pension, it’s invested into one or more funds with the aim of helping your savings grow. Funds can be made up of a range of assets - assets can commonly include equities (company shares), bonds (loans to businesses and government), cash or property.

There are many different factors that pose both a risk and an opportunity to the growth of your savings.  A responsible investing approach enables us to focus on a key area, which is the consideration of environmental, social or governance (ESG) issues.

ESG issues include things like how responsibly a company is run, climate change, financial and social inclusion, healthcare and human rights. How these issues are managed today could determine the future state of your pension performance, as well as our society and planet.

LGIM considers ESG issues as part of the investment process for the funds it manages. This helps LGIM to manage investment risks and opportunities and seek the best possible financial returns for our pension members.

Examples of ESG factors

Environmental issues include:

• Carbon emissions/level of greenhouse gas emissions
• Deforestation and biodiversity policies or practices
• Green energy initiatives

Social issues include:

• Human rights
• Inequality around health, sexuality, gender, physical ability, age, ethnic or social background
• Data security

Governance issues include:

• Organisations that fail to keep proper track of their financial accounts
• A lack of diversity on governing boards that can lead to inward thinking which can stifle innovation
• No robust oversight of the makeup of a senior team which may lead to bad decisions being made

LGIM also takes an active ownership approach, also referred to as 'engagement' or 'stewardship', on behalf of all the funds it manages. This is where LGIM combines its incorporation of ESG considerations into investment decisions with engagement with companies, regulators and policymakers, to help generate sustainable behaviours and outcomes. We'll talk more about this later in the presentation.

What it is and what it isn’t

A responsible investing approach doesn’t necessarily mean that all the companies in which a pension fund is invested are considered sustainable. For example, the fund may include investments in oil and gas companies.

What it does mean is that, through active ownership, LGIM can identify areas for improvement and engage with companies to help them meet better standards. For example, engaging with oil and gas companies to future-proof their strategy and lower their carbon emissions, resulting in activities that have less environmental impact and take advantage of new clean energy technologies.

We have a duty to manage our clients' and members' investments in a way that seeks to deliver the best financial returns. This means that they will often be invested in a diversified fund - or funds - that provide exposure to a range of companies and sectors.

Slide 5 – Climate change

Let's take a closer look at the E of ESG. Climate change is one of the defining issues of our time and a financially material risk. It was also LGIM's top active ownership topic of 2022 with 281 engagements focused on climate change issues.

Did you know

According to the United Nations Climate Action, the average temperature of the Earth’s surface is now about 1.1°C warmer than it was in the late 1800s (before the industrial revolution) and warmer than at any time in the last 100,000 years. The last decade (2011-2020) was the warmest on record, and each of the last four decades has been warmer than any previous decade since 1850.

Slide 6 - The journey to Net Zero

Most of us are aware that carbon emissions (CO2 emissions) are accumulating in the earth's atmosphere. These increased carbon emissions are causing global temperatures to increase and changing the climate of our planet.

We can help slow down global warming by making sure that what we release into the atmosphere in the form of planet-warming greenhouse gases (produced through human activity, industry, agriculture, energy and other activities) is balanced by the carbon our natural world can absorb through trees, soil, oceans and new technologies for carbon capture.

Net Zero is where what is released matches what is absorbed.

The Paris Agreement, often referred to as the Paris Accords or the Paris Climate Accords, is an international treaty on climate change. Adopted in 2015, the agreement covers climate change mitigation, adaptation, and finance. 

The Paris Agreement's long-term temperature goal is to keep the rise in mean global temperature to well below 2 °C above pre-industrial levels, and preferably limit the increase to 1.5 °C, recognizing that this would substantially reduce the effects of climate change. Emissions should be reduced as soon as possible and reach net-zero by 2050.

But why do we need to consider climate change in relation to pensions? Climate change carries risks to investments. Not only can extreme weather events like floods and fires affect companies' profits, but high-polluting industries are facing increased competition from cleaner, cheaper energy sources.

In support of the Paris Agreement, several funds within the Workplace pension range aim to lower carbon (decarbonisation) towards an end goal of net zero by 2050. This includes the four main standard default investment options. In addition to this, the LGIM Climate Impact Pledge was introduced in 2016 in recognition of the potentially catastrophic consequences of climate change on global ecosystems. It is a targeted engagement programme that assesses approximately 5,000 companies worldwide – across 20 climate-critical sectors – on their climate commitments and efforts to limit carbon emissions (one of the key greenhouse gases) to net zero by 2050. LGIM also engages with a subset of these to influence and support them to reach this objective.

More details on the funds that incorporate these approaches can be found on the Environment page of our ESG Hub, which you can also access by scanning the QR code.

Slide 7 - What our members say

As part of our annual survey, released in May 2022, we asked 4,500 adults in the UK paying into a workplace pension what they thought about responsible investing.  Our respondents were split across generations and genders and across the UK and Ireland. 

• 87% of respondents want their pension to have a net-zero target
• 57% said that climate change will have a longer-term impact on the UK Economy than COVID-19
• 84% want to stop investing in fossil fuels
• Only 12% of Boomers, born between 1946 and 1964, would increase contributions because of knowing more about how their provider was managing their investor rights
• 80% of Gen X, born between 1965 and 1980, would be more involved with their pension if they knew it was encouraging companies to have a positive impact
• 53% of Millennials, born between 1981 and 1996, only became aware of what ‘net zero’ is due to publicity around COP26
• 81% of Gen Z (those born between 1997 and 2012) were willing to pay more for a pension with net zero carbon emissions

If you'd like to find out more, please go to our dedicated webpage or scan the QR code.

Slide 8 - Responsible investing and your retirement savings

LGIM may invest a part of pensions in companies, either through purchasing shares or lending money to companies by buying their bonds. By investing in a range of companies, our investment management business, Legal & General Investment Management (LGIM) becomes a shareholder. This means that it can vote and engage on important issues, challenging companies to do better on ESG issues.

For example, LGIM can engage with a company over its environmental policies, challenge it on its board diversity or its record on workers' rights.

This could be through collaborative meetings, discussions with stakeholders and policymakers, making public statements, and exercising our voting rights as a shareholder.

When LGIM invests in a company, there is an opportunity to make the business better, with the aim of having a more positive effect on your savings, society and the environment.

This active ownership approach is relevant across our internal funds managed by Legal & General and LGIM.  External funds and fund managers may take a different approach to responsible investing and active ownership.

We’ll now play a short video about our 'Active ownership' approach.

Video transcript:

Responsible investing for pensions - How a pension can challenge companies to behave more responsibly

Did you know that by making monthly contributions into your pension plan, you could play a part in helping companies improve their effect on the environment and society?

This is done through an investment process known as active ownership. Our investment management business Legal & General Investment Management (referred to as LGIM) applies active ownership across all the funds managed by Legal & General and LGIM.

Disclaimer text on screen: External fund managers may take a different approach to active ownership.

If you haven't chosen your own funds, your money will be automatically invested in the default investment option for your work’s pension plan, chosen by your employer.

Here’s an example of how it works across the standard default investment options offered by Legal & General.

Disclaimer text on screen: The standard default investment options used as an example are Target Date Funds, Multi-Asset Fund, Future World Multi-Asset Fund, and L&G Drawdown Lifestyle Profile. Your employer or the trustees of your pension scheme may have chosen a different default option.

With the aim of helping pension savings grow, LGIM will invest a part of the standard default investment options in companies, either through purchasing shares or lending money to companies by buying their bonds. This means that LGIM becomes a shareholder in the companies it invests in and can influence positive change.

A key way to do this is to consider how companies manage environmental, social and governance, or ESG, risks and opportunities. This includes issues such as climate change, fair work conditions, executive pay, supply chain management and impact on local communities.

This is important because poor management of ESG factors may have a negative impact not only on the performance and longevity of a company – and therefore potentially your pension value – but on wider society, the planet and the economy.

LGIM assesses how companies handle ESG risks and opportunities and how transparent they are in reporting them. Importantly, as a shareholder LGIM can engage and cast shareholder votes on important issues, challenging companies to do better.  For example, LGIM can challenge a company over its environmental policies, the level of its greenhouse gas emissions, the diversity of its board of directors, or its record on workers' rights.

So, your pension is working behind the scenes striving for better outcomes for you, our planet and society.

More information on responsible investing and active ownership can be found on the Legal & General Workplace ESG Hub. You can also check the investment options available to you by logging into Manage Your Account.

Disclaimer slide:

The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested.

Legal & General Assurance Society Limited. Registered in England and Wales No. 00166055. Registered office: One Coleman Street, London EC2R 5AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Slide 9 – Taking Action: 2022 engagement in numbers

This slide provides details of LGIM’s engagement with companies during 2022.

LGIM's Investment and Stewardship teams engage with companies (those included within our internal funds that are managed by a Legal & General company) to ensure that they are managing environmental, social and governance (ESG) risks and opportunities, both short-term and longer-term. This can be known as active ownership.

ESG assessments and ongoing dialogue with and monitoring of companies is a fundamental aspect of our commitment to responsible investment. Engagement will be triggered in a variety of ways, such as a regular meeting with the companies; research and analysis of responsible investment themes and voting issues; general knowledge of the company; or a media article on the company that requires discussion. LGIM engages with both management and non-executive directors, although its initial contact is usually with board directors and chairs.

LGIM believes voting is also a powerful tool to help address issues that affect wider society and the planet - such as climate change and social inequality - and which could affect the value of our members' pensions. If a company doesn't deliver sufficient improvements in ESG standards, LGIM will use its voice to send a strong message to the company board by exercising its voting rights as a shareholder.

LGIM discloses the details of its vote instructions on a per-meeting basis, with the rationale provided for all votes cast against management.

LGIM believes in driving positive change from within and that engaging with companies leads to better outcomes, rather than removing their investments at large scale (divestment). However, LGIM can stop investing or reduce its holdings in companies if they fail to meet minimum ESG standards expected and don’t demonstrate a commitment to change.

Targeted exclusions can also be a very powerful tool. For certain activities, where engagement is considered to provide limited scope for change, where activities present investment risk and or where they are in breach of international conventions and treaties, LGIM may apply broad exclusion policies. Funds that incorporate minimum and ethical exclusions are noted in our Responsible investing guide which you’ll find in the ‘Your investment choices’ section of the ESG Hub.

Slide 10 - Engagement in action

Now we'll tell you about some real-life examples of LGIM’s engagement with companies, organisations and policymakers in 2022. The issues highlighted are not exclusive to those named in the examples. It is for illustrative purposes only. Reference to a particular company is on a historic basis and does not mean that shares or bonds in the company are currently held or will be held within an LGIM fund or portfolio. The information does not constitute a recommendation to buy or sell any security.

Following prior engagement with LGIM, in 2021 Sainsbury’s was paying a real living wage to all employees, except those in outer London. In April 2022, LGIM joined ShareAction (a charity that works to build a financial system that benefits its people and planet) in filing a shareholder resolution asking the company to become a living wage accredited employer. As an accredited living wage payer, the company would be obliged to ensure that all workers within its premises were earning the real living wage, including its contracted staff and those in outer London.

LGIM considers that the successful companies of the future will be those that recognise the importance of all employees – not just those who are directly employed, but also contractors and those within their supply chains. LGIM encourages companies to work together to make the living wage the new normal for lower skilled staff.

We've been helping to address the difference in pension savings between men and women.

In 2021 Legal & General set up a Pensions Equalities Taskforce to engage with the UK government, regulators and trade bodies to establish priority actions, bring providers and industry representatives together to collaborate on research and representation, and work with employers and clients to help find solutions.

In 2022, the taskforce conducted a survey of over 4.5 million pension scheme members and found that the gap starts on ‘day one’ in the job, with an average 16 per cent gap at the start of women’s careers, increasing to a gap of 55 per cent on retirement. A mix of factors, including lower salaries, career breaks and auto-enrolment minimum threshold requirements, mean that, on average, women retire with a pension pot of less than half the size of men's.

Given that women tend to live four years longer than men on average, lower savings will limit their choices in retirement. Therefore, we believe this is a critical issue for all companies and has very real consequences.

For more information on this go to our ESG Hub or scan the QR code.

Slide 11 - Your choices

When you join your employer’s pension, there is a "default investment option" which is where your money is invested if you don’t make a different choice. (You can, of course, self-select any of the other funds or lifestyle profiles available to you.) 

You can find details of both the fund you are invested in and the range of other funds available by visiting your online account or your scheme website, or by scanning the QR code. You can change the funds that you are invested in by going to your online account. Any decision should be considered alongside your risk appetite, financial goals, how and when you intend to access your pension savings as well as your individual beliefs and values.

Some investment options change where your savings are invested as you approach your retirement age, others don’t! So, it’s important to review where you are invested and to check that this is in line with your plans for retirement.

Please be aware that the value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Different funds have different associated risks. Please read the relevant fund documentation before making any investment decisions.

You may want to take financial advice before making any changes to your investments. You can find a local financial adviser at unbiased.co.uk or by scanning the QR code. Financial advisers usually charge for their service.

Slide 12 – Our default investment options

Legal & General has four main standard default investment options:

• Target Date Funds
• Multi-Asset Fund
• Future World Multi-Asset Fund
• Legal & General Drawdown Lifestyle

These investment options include some or all of the following responsible investing elements:

• Sustainable assets included in the overall investment mix, e.g. listed sustainable infrastructure or listed timberland.
• Incorporates ESG considerations into investment decisions along with Active ownership.
• Minimum exclusions applied where LGIM believes the companies fail to meet minimum standards of globally accepted business practices.
• A climate engagement programme – LGIM Climate Impact Pledge.
• Decarbonisation commitments towards an end goal of Net Zero by 2050.
• An ESG scoring approach that scores companies out of 100 and aims to invest more in higher-scoring companies. Reducing exposure to companies with worse-than-average carbon emissions (a key greenhouse gas) and fossil fuel assets, while increasing exposure to those that generate revenue from the green transition, such as renewable energy. This is called tilting. In terms of our 4 main default investment options, the Target Date Funds and Future World Multi-Asset Fund use tilting. The Retirement Income Multi-Asset Fund uses 50% tilting. The Multi-Asset Fund does not use tilting.

You can find out more on the approaches and which funds apply which elements in our  Responsible investing guide, which is also available on the ESG Hub.

Please be aware that your employer - or, where applicable, the trustees of your scheme in conjunction with their investment advisers - may have chosen their own default investment option.

Slide 13 – Our range of investment options

We recognise that employers and members have different goals and attitudes when looking for the right pension investment for them. That’s why we offer a variety of pension funds with varying levels of responsible investing approaches incorporated. 

Some of our investment funds feature additional elements of responsible investing to cater for particular values and beliefs. Across our range of investment options, we provide funds that also:

• exclude companies with activities in relation to fossil fuels
• exclude industries, practices or companies considered to be involved with harmful products and practices, such as tobacco, gambling, or animal cruelty
• aim to invest more in companies considered to be making a positive contribution to society and/or market leaders in areas such as energy transition and health and wellbeing
• are governed to meet the requirements of Shariah law

Please note that different funds incorporate different levels of responsible investing. For more information see page 7 of our Responsible investing guide, which you can also access via the ‘your investment choices’ section of our ESG Hub or by scanning the QR code.

Slide 14 - Discover more about responsible investing

You can find out more about ESG and how it relates to pensions on the Legal & General Workplace ESG Hub.

If you want more detail on how pensions incorporate responsible investing, our responsible investing fund guide will help you understand the different options. If you’d like to review or change the funds you invest in, please log into Manage Your Account.

Slide 15 - Thank you.

To see which fund you are invested in, or if you’d like to review all the funds available to you or to change the funds you invest in, please log in to your secure online account. It’s easy to register if you haven’t already done so. All you’ll need is your customer reference number from your welcome letter or member certificate. You can also access our ESG hub via the QR code below.

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For WorkSave Pension Plan (WPP)

Legal & General (Portfolio Management Services) Limited.
Registered in England and Wales No. 2457525. Registered office: One Coleman Street, London EC2R 5AA.

We are authorised and regulated by the Financial Conduct Authority.

For Group Stakeholder Pension (GSHP), WorkSave Buy Out Plan (WBOP) and Trustee Buy Out Plan (TBOP)

Legal & General Assurance Society Limited

Registered in England and Wales No.166055. Registered office: One Coleman Street, London EC2R 5AA.

We are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

 

For Mastertrust (WMT) and Own Trust (WPT)

Trust-Based Occupational Pension Schemes are authorised and regulated by The Pensions Regulator.

Administrator: Legal & General Assurance Society Limited. Registered in England and Wales No. 00166055. Registered office: One Coleman Street, London EC2R 5AA.

Legal & General Assurance Society are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. However, the administration of occupational pension schemes is not regulated by the FCA or PRA.