1 Oct 2020
LGIM announces climate solutions capability powered by risk and alignment framework co-developed with Baringa Partners
Legal & General Investment Management (LGIM) and Baringa Partners, a leading management consultancy and specialist in climate and physical risk analysis, have today revealed the co-development of a bespoke climate risk framework, Destination@Risk. The framework is powered by a range of tools, including Baringa’s Climate Change Scenario model. The model was adopted by Legal & General earlier this year after the two firms collaborated to build one of the market-leading climate change risk management frameworks available today.
- LGIM to be able to robustly quantify physical and transitional risks of climate change within investment portfolios using proprietary climate scenarios
- Preliminary data and initial analysis of a sample set of 2,000 companies showed that the majority are not aligned to climate outcomes consistent with the Paris goals
- Raising concerns some investors’ portfolios may be aligned to climate outcomes of greater than three degrees climate risk and alignment will be fully integrated into all LGIM’s investment activities globally through a “climate dashboard”
Destination@Risk allows the robust measurement of the climate risk embedded in investors’ portfolios and their climate alignment. By the first quarter of 2021 a climate risk dashboard will be available to portfolio managers and analysts within LGIM, enabling LGIM to embed climate risk and alignment in a consistent way throughout the entire global investment function. Destination@Risk has been developed over a period of 18 months in partnership with Baringa using its Climate Change Scenario model as a critical foundation, and was first used to evaluate the climate risk and alignment of L&G’s own balance sheet assets, as detailed in the firm’s 2019 Task Force on Climate-related Financial Disclosures (TCFD) report.
LGIM will also launch a climate solution capability for institutional investors, also available from the first quarter of 2021, which will deploy the modelling tools developed, to measure the climate alignment of client assets, and to design and implement Pathways to Paris” solutions.
The climate risk and alignment framework has initially been used to analyse around 2,000 companies globally, and has concluded that the majority of companies are not aligned with the Paris objectives, raising concerns that some institutional portfolios may be aligned with temperature outcomes of greater than three degrees. The modelling has also been used to assess both the transitional and physical risks in the companies analysed. No company assessed was immune to climate risks, but significant risk concentration was identified in a number of sectors. This evaluation has confirmed that climate presents a first order material risk for long term investors.
Climate Change is one of the biggest risks that investors are facing today, with $10 trillion of capital invested worldwide in the globally listed energy sectors. This is amongst the most vulnerable sector in investor portfolios when it comes to the energy transition required to meet the Paris Climate agreement by 2050.
The scale of the risk and capital employed is significant. Yet, properly assessing the financial materiality of this climate risk is a significant challenge for investors today. We believe our framework and modelling capabilities will allow investors to properly assess climate risk in their portfolios and to make strategic asset allocation choices that will have a real impact on the type of energy system that is built.
Sonja Laud, Chief Investment Officer (CIO), Legal and General Investment Management
The world needs to redirect around $1 trillion dollars a year to the energy system of the future away from the fossil fuel dominant sector that exists today. For this capital to move, climate risks and opportunities need to be properly priced. That relies on investors developing robust, transparent and flexible risk management frameworks.
It is therefore no surprise that our clients frequently ask us how they can assess the true impact of climate and transition risk on their investments and how they can align their portfolios with the Paris Climate agreement without sacrificing risk-adjusted returns. Working with Baringa Partners, a leading expert in this area, we have developed a market leading solution to this problem.
Nick Stansbury, Head of Commodity Research, Legal and General Investment Management
We are excited to have partnered with LGIM to develop their Destination@Risk solution. This has leveraged our leading Climate Change Scenario model, as well as our 20 years’ experience advising governments, the energy industry, and the financial services sector on climate change. Destination@Risk will give LGIM’s clients the ability to understand the climate risk and temperature alignment of individual assets, providing the critical foundation to enable investors to make investment decisions that can both reduce risk and improve the environmental impact of their portfolios. This will drive the reallocation of capital needed, and create the incentives for corporations to accelerate transition, to mitigate climate risk and move towards Paris.
Colin Preston, Financial Services Sector and Climate Change lead, Baringa
For further information
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Notes to editors
Legal & General Investment Management:
Legal & General Investment Management is one of Europe’s largest asset managers and a major global investor, with total assets under management of £1.2 trillion (€1.4 trillion, CHF 1.5 trillion, JPY 166 trillion, $1.5 trillion) . We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
Throughout the past 40 years we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property and cash.
Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
1LGIM internal data as at 30 June 2020 These figures include assets managed by LGIMA, an SEC Registered Investment Advisor. Data includes derivative positions
For more information or to arrange an interview please contact: firstname.lastname@example.org. Baringa Partners is an independent business and technology consultancy. We are working globally with goverments, financial services clients and the energy industry, as well as across other sectors, to accelerate de-carbonisation, manage risks and adapt to climate change. We work with many of the largest banks, insurers and investors globally, including advising on many of the largest renewable energy projects that are already generating sufficient power for over 200 million homes.
Baringa launched in 2000 and now has over 700 members of staff and more than 70 partners across our five practice areas of Energy and Resources, Financial Services, Products and Services, and Government and Public Sector. These practices are supported by cross-sector teams focused on Customer and Digital; Finance, Risk and Compliance; People Excellence; Supply Chain and Procurement; Data, Analytics and AI; Intelligent Automation and Operations Excellence; and Technology Transformation. We operate globally and have offices in the UK, Germany, Australia, US, and the Middle East.
Baringa Partners has been voted as the leading management consulting firm for the third year in the Financial Times' UK Leading Management Consultants in the category Energy & Environment. We have been in the Top 10 for the last 10 years in the small, medium, as well as large category in the UK Best Workplaces™ list by Great Place to Work®. We are a Top 50 for Women employer, and are recognised by Best Employers for Race.
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