The Next Step in Low-Carbon Investing

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    Stockholm (NordSIP) – During a recent visit to Stockholm, Meryam Omi, Head of Sustainability and Responsible Investment Strategy at Legal & General, met with NordSIP to talk about how she thinks a low-carbon strategy should be implemented.

    For Omi, who entered the sustainability field through her involvement in governance questions, and then went on to the “E” dimension of ESG seven years ago with a Masters in Environmental Studies, “everything is happening very fast but you need to stay ahead. There are so many ways to implement ESG and sustainability but a lot of things are badly done. Lots of funds tick boxes but they don’t actually achieve anything. We all need to think very hard and ask ourselves: are we having the right impact on society?”

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    Initially, when Omi pursued her environmental studies, “it was still a dark period for climate change,” she says. “We set an ambitious target for my team to achieve significant progress within 3 years, and pretty much everything happened in the second year. It has been a rollercoaster, and I feel I am still on it. We need to keep pushing and not be complacent.”

    Legal & General has adopted a multidimensional approach to ensure its low-carbon strategy is at par with the high standards the company aims for in the sustainability dimension. First, the firm has set up a low-carbon index, which captures green transition. “The methodology is quite different than what I have seen in the market,” comments Omi. “We propose a factor-based index, not a market-cap based one. A lot of the climate-themed funds only address the risk side of the carbon and end up excluding companies that are producing the solutions, like renewables. This is because heavy polluters like electric utilities are also producers of renewables. What we do is tilt away due to emission but tilt back in due to the green opportunities. The whole point is to capture the transition. There are potentially very good investment opportunities in traditionally not-so-green industrial, chemical, or energy companies.”

    “On top of that,” continues Omi, “you can’t solve climate problems just by looking at data.” This is where the second aspect of Legal & General’s strategy comes in play. “We have a firm-wide commitment to engage with key industries that are pivotal in the transition. We engage with them. If within a one-year timeframe, the companies haven’t achieved what they should, we divest from the absolute laggards. We can do that, even with an index fund. This produces a very small tracking error, meaning that it makes a very small difference to the performance against the index. But the message is very strong and it is quite a powerful tool.”

    “Thirdly, it is important to remember that we manage £1 trillion in AUM, of which half is equity. We have selected 84 of largest companies worldwide in the key sectors, and ranked them based on how they embrace transition. We lobby with the governments and engage to improve on standards. When the companies do not take ESG issues seriously and do not communicate about them, we use our vote to oppose the Chairman’s election.”


    Picture (c) – NordSIP

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.
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