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Legal and General Investment Management (LGIM) has announced that from 2025 it expects to see climate targets incorporated into companies’ long-term plans. According to the UK’s largest asset manager, these targets should be in accordance with transition goals to reach net zero across the full value chain, including scope 1–3 emissions, and ideally be approved by the .

LGIM’s policy changes were disclosed in the asset manager’s new version of its , which was updated in late October 2022. However, LGIM’s more stringent climate change policy is to only apply to certain industry sectors—specifically: autos, apparel, aviation, banks, cement, chemicals, food, insurance, mining, oil & gas, REITs, shipping, steel, technology, telecoms and utilities.

In addition to the disclosure of climate targets, from 2025 the asset manager will expect companies to link them to at least 20% of the long-term incentive plans (LTIPs) awarded to senior executives or, in the case of restricted share plans, that one of the underlying foundations of such plans be the achievement of transitional carbon reduction targets. Moreover, for those industry sectors with the greatest impact on climate change, LGIM will expect that the vesting of awards will be conditional on the success of pre-disclosed transition climate targets.

The asset manager’s new climate change policy follows its declaration in late 2021 that it was to stop providing almost all of its direct feedback to issuers in relation to executive remuneration after the asset manager found that the feedback that it provided to companies was usually ignored (see: LGIM to stop providing executive remuneration feedback to issuers). LGIM against 137 out of 593 (23.1%) remuneration reports at UK companies, as well as opposing the (re-)election of 80 remuneration committee members during 2021. Globally, the asset manager opposed 42.4% of all pay-related proposals.

Another key change in LGIM’s new version of its UK principles on executive pay is a general warning to those companies that have given their low salary employees a significant pay increase to help with the ongoing cost-of-living crisis. The asset manager believes that consideration should be given to the impact of a similar increase on the total pay for senior executives, given that remuneration packages often include incentives that are based on a percentage of base salary.

LGIM is not the only investment body to set out its expectations with regards to the linking of ESG issues and executive pay. Market Tracker addressed the investment community’s growing interest in the connecting of ESG concerns and executive remuneration outcomes earlier in 2022 (see: Investment community increasingly vocal on linking executive pay to ESG criteria). For more information on this topic, as well as the positions of others in the investment community, see the ‘Executive remuneration’ section in: .

It is not just institutional investors and advisory bodies that are looking at this area of corporate governance. An increasing number of FTSE 350 companies are examining how they can link ESG concerns and executive remuneration outcomes. For instance, the Watches of Switzerland Group plc stated the following in its 2021 :

‘The [Remuneration] Committee is also mindful of Environmental, Social and Governance (ESG) issues and the importance of linking executive pay to ESG goals. It is an area that is being reviewed more broadly and as the Company develops its strategy more fully in this area, the Committee intends to review the current incentive framework to determine how to better link Executive Director remuneration with ESG performance. This is an area that will also be considered as part of the Committee’s review of the Remuneration Policy next year. In the meantime, for future bonus and LTIP awards the Committee intends to review ESG factors as part of its holistic assessment of the overall appropriateness of pay outcomes.’

Similarly, 4imprint Group plc noted in its own 2021 that one of its future priorities is to ‘review ESG-linked remuneration and inclusion of climate-related metrics at the executive level’.

During the 2022 AGM season, there were only three shareholder requisitioned resolutions at FTSE 350 companies on the subject of climate change reporting and disclosure, all of which fell short of the majority support required to pass (BP plc (14.9%), Standard Chartered plc (11.8%), Shell plc (20.3%)). However, this hides the gradual success that many investors have had during their engagement activities with issuers. For instance, see: The letter versus the spirit—the pitfalls of resolution interpretation and HSBC given smack on the wrist by ASA for ‘greenwashing’ ads for information on the ongoing ShareAction-HSBC dispute in relation to the disclosure of climate targets to cover the bank’s operations in capital markets.

Market Tracker will continue to examine new updates in relation to climate change disclosures and ESG-related corporate governance trends as they develop. Market Tracker’s analysis of TCFD-aligned climate-related disclosures by premium listed companies in 2022 is to be released shortly.