Legal & General Targets Eight Firms for Climate Risk Inaction

Legal & General Investment Management (LGIM) said it will vote against the reappointment of the chairmen of eight companies “that have shown persistent inaction to address climate risk.”

The companies LGIM is singling out are China Construction Bank, petroleum refiner Rosneft Oil, state-owned conglomerate Japan Post Holdings, petroleum and natural gas exploration and production company Occidental Petroleum, food retailer Loblaw, electricity supplier Dominion Energy, automaker Subaru, and food distributor Sysco Corp.

In 2016, LGIM introduced its Climate Impact Pledge, which aimed to give companies a push toward addressing climate change and transitioning to a low-carbon economy. The investment management firm initially focused on engaging with 84 of the world’s largest companies across different sectors and regions, which it identified as essential in meeting the 2°C target set in the Paris Agreement climate accord.

“Climate change is a significant issue for society and investors, and we have a limited amount time to act,” Meryam Omi, head of sustainability and responsible investment strategy at LGIM, said in a release. “Our role is to ensure companies in different industries transition successfully, and therefore we are committed to helping them do that with our Climate Impact Pledge.”

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LGIM assessed, scored, and ranked the companies against more than 50 indicators, such as whether they have a corporate statement that recognizes the impact of climate change, if they are fully transparent on their carbon contribution, and whether the board has a diverse composition.

LGIM said 74% of the 84 companies responded to letters, which resulted in meetings with 61% of the companies. The firm said it believes these meetings “contributed to a number of positive moves by firms,” which included automobile manufacturer Toyota, bank Wells Fargo, and Australia’s Commonwealth Bank.

It also said that since it launched its engagement process in April 2017, climate scores for US companies have improved, with median Japanese, Australian, and South Korean companies also rising. However, it said median French, UK, and German companies had not shown any improvement.

LGIM said that when ranking the companies, it found contrasting approaches by sector, with utility companies among some of the best and worst performers, while oil and gas companies, and auto manufacturers saw overall improvements in their scores.

While the firm was critical of the eight companies, it also praised companies that it found were “making significant progress and leading initiatives to address climate risk.”

Those companies include Spanish utility Iberdrola, which it said has called for “ambitious EU emissions reductions,” and has lobbied for the EU to raise its carbon price; and French oil and gas giant Total, which said it will put a climate-compliant 2°C scenario at the center of its strategy, and will increase its focus on renewables and natural gas.

LGIM also commended French bank BNP Paribas for disclosing the carbon content of the power plants it finances, and for its plans to reduce this in line with the global averages needed to reach the 2°C objective. The company has also recently announced that it will no longer finance the development of “extreme” fossil fuels such as coal and tar sands.

Additionally food and drink company Nestlé was also cited for setting targets to reduce greenhouse gas emissions by 2020 in line with the Paris Agreement, and disclosing the 2020 targets and how it is performing against them.

“Our overriding goal is to help protect our clients’ investments,” said Omi. “We engage with companies to positively influence their governance, strategy, and transparency. We want to show that the transition to a low-carbon economy is possible, and work with companies towards this goal.”

Tags: Climate Change, ESG, Legal & General Investment Management (LGIM)

Merrill Lynch, Pierce, Fenner & Smith Inc. has agreed to pay $15.7 million to settle SEC charges that its employees misled customers into overpaying for residential mortgage-backed securities (RMBS).

The SEC said that Merrill Lynch traders and salespersons convinced its customers to overpay for RMBS by lying about the price Merrill Lynch paid to acquire the securities. Merrill was a broker-dealer engaged in secondary market trading of non-agency RMBS, according to the SEC.

In trading non-agency RMBS, Merrill purchased the securities for its own account and then sold them from its own account to its customers. Merrill didn’t charge a commission on the trades, but instead profited from the difference between the price of the securities it sold, and the price at which it had purchased them.

“The false or misleading statements led customers to accept less, or pay more, for securities than they otherwise might have accepted or paid,” said the SEC in its charges. “Merrill personnel, directly and indirectly, made false or misleading statements to Merrill customers.”

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The SEC also said Merrill Lynch’s RMBS traders and salespersons illegally profited from “excessive, undisclosed commissions,” which in some cases were more than twice the amount the customers should have paid. The SEC’s order said Merrill Lynch failed to have compliance and surveillance procedures in place to prevent and detect the misconduct that increased the firm’s profits on RMBS transactions “to the detriment of its customers.”

In one instance, Merrill purchased more than $15.6 million original face amount of a bond at a price of $1.86. Later that day, one of its traders, through a salesperson, sold the bond to a Merrill customer at a price of $4.00, which represented an intra-day mark-up of 115.1%, and profits to Merrill of approximately $334,289, according to the SEC.

Merrill traders made false or misleading statements directly to customers in some cases, said the SEC, and in other instances, traders made false or misleading statements to Merrill salespersons, who then communicated the bad information to customers. It also said some Merrill salespersons made their own false or misleading statements to customers.

Although the firm neither admitted nor denied the SEC’s charges, Merrill Lynch agreed to be censured, pay disgorgement and interest of more than $10.5 million to its customers, and pay a penalty of approximately $5.2 million.

“In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information,” Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in a release. “Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”

Tags: Fenner & Smith, Merrill Lynch, Pierce, RMBS, SEC