LGIM: Earth song: Why pension investors are singing nature’s praises

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From water management to property, investing in biodiversity will change a broad spectrum of industries. We look at the green themes promising to shake things up – and what scheme members think. 

In 1970, Joni Mitchell famously warned us that “you don’t know what you’ve got ‘til it’s gone.” But today, biodiversity loss, the diminishing variety of living species on Earth – from plants and animals to bacteria and fungi ¹ – and its close relative, nature loss, are happening at unprecedented speeds.

There are multiple reasons why we believe we need to re-use what we have more efficiently, and extract what we don’t less intensively. Some are well-documented: lowering carbon emissions and global warming or preserving the Earth’s natural resources. Less well-known is that besides our ecosystem’s environmental, health and emotional value, a partial collapse could cost 2.3% of global GDP (or $2.7 trillion) per year.² 

While we at LGIM have been engaging with companies and governments on these issues since 2016, over the past year they have raced up the agenda. And we reflect our commitments in how we invest on behalf of our members. In 2023 so far, we’ve reflected the emerging themes of green real estate, cleaner water and sewage companies and sustainable packaging in one of our DC defaults, the Target Date Funds and Future World Multi-Asset Fund. Together, these funds have nearly 2.7 million members’ retirement savings invested in them.³ 

Green green grass of homes

We believe the real estate sector is critical in the fight against climate change and nature loss: 28% of global carbon emissions come from building operations and 12% from construction and maintenance, which may also contribute to natural destruction.⁴

Standard carbon intensity metrics don’t capture this well in our view. That’s why LGIM has developed the Green Real Estate Score, which assesses relevant metrics, including the share of a company’s total property portfolio with green building certifications; carbon across the life of the building; and the number of customer eco-efficiency programmes. 

Since the beginning of 2023, we’ve added a new allocation to LGIM’s Future World Global Real Estate Equity Index Fund into our DC defaults. The fund is tilted towards companies with a higher Green Real Estate Score, while also combining company engagement and screening of LGIM’s Future World Protection List.

Chasing waterfalls

Attention to biodiversity and natural capital matters more in some sectors than others in our view. In the UK, for example, we have seen water utilities come into focus for leaks
during droughts, exacerbated by climate change as well as too-frequent effluent discharge into rivers. 

Last year, we integrated biodiversity metrics into LGIM’s ESG tools, including our proprietary ESG Score ⁵. In 2023 so far, we’ve updated LGIM’s proprietary ESG scores to include water for some sectors. In our Future World Multi-Asset Fund, we’ve added an allocation to Severn Trent*. 

Opening the floodgates: Severn Trent*

Severn Trent topped the Environmental Agency’s 2021/2022 review as an ‘industry-leading company’, with a four-star rating from 2019 to 2021 and is on track for the same rating in 2022, with its best-ever performance on pollution. The company has also set up green initiatives such as the ‘Great Big Nature Boost’. The company scores very well on a range of natural capital metrics we are evaluating, which means it’s working to reduce nature loss. 

Seeing the trees for the wood

Forests store approximately 662 billion tonnes of carbon ⁶ and are home to between 60% and 80% of Earth’s amphibian, bird, mammal and vascular plant ⁷ species.⁸  Reducing deforestation is therefore crucial in the fight against both climate change and biodiversity loss.  While metrics related to deforestation are increasingly available, we believe more needs to be done to standardise and broaden this data. Since the turn of the year, we’ve included deforestation in relevant sectors in our ESG Scores, and we also continue to gather member feedback. These inform our continued engagement on this and related issues such as recycled packaging with companies in key sectors, such as Kroger*.

Not just a pretty face: Kroger*

With 2,720 outlets, Kroger is the second largest food retailer in the US after Walmart. Recent engagements with the company have been positive, and although it was initially excluded from several of our funds, in 2021, we reinstated Kroger in relevant funds following improvements in its deforestation policies and disclosures. We also recognised Kroger’s efforts to promote plant-based products, minimising its climate impact. The views of our members have been influential, too. In 2022, votes on Kroger were member favourites on the Tumelo platform, which allows members to give their views on forthcoming annual general meeting issues. Over 93% of members were in favour of the motion: ‘Should Kroger report on the environmental impacts of using non-recyclable packaging?’. LGIM voted in favour.

Mother nature’s gone?

While we are still some distance from accurate and transparent metrics, the environmental and financial cost of waiting to act on biodiversity and nature loss is simply too high, which is why we are integrating these themes into our investments now. In our view making a real difference in preserving the earth’s natural resources comes down to engagement with multiple themes: from real estate to retail. We know our members care about it too – which should be a win-win for providers and folk ballad fans alike in
our view.

¹ National Geographic website https://education.nationalgeographic.org/resource/biodiversity  ² https://www.worldbank.org/en/news/press-release/2021/07/01/protecting-nature-could-avert-global-economic-losses-of-usd2-7-trillion-per-year.  ³ Source: LGIM as at 31 December 2022  ⁴ Source: LGIM, 2023.  ⁵ applicable to our Target Date Fund defaults  ⁶ The State of the World’s Forests 2022 (fao.org)  ⁷ Plants that have “veins” that transport water/food. These make up 80% of all plant species.  ⁸ The State of the World’s Forests 2022 (fao.org)

*Reference to a specific security is for illustrative purposes only and is not a recommendation to buy or sell the security.