07 Jan 2022 5 min read

COP26: collaboration on a scale I’ve never before encountered in my career

By Michelle Scrimgeour

For responsible investors, divestment can have unintended consequences – and engagement is often underappreciated.


Down, but not out – yet. Many have expressed disappointment that the agreement reached at COP26 softened the commitment to ‘phase out’ coal, speaking instead of phasing ‘down’ its use. As a founding signatory to the Net Zero Asset Managers Initiative, I share that frustration – although I do not believe it should overshadow the real progress made on new rules to limit greenhouse gas emissions. Indeed, this was the first COP pact to refer directly to coal or fossil fuels.

Public policy is only part of this story, however. Co-chairing the COP26 Business Leaders Group, I was really encouraged by the consensus emerging across the private sector on the need for alignment and unity to make net zero a reality – collaboration on a scale I have never before seen in my career. This broader context should inform our view of what was achieved at COP26.

Immense challenges nevertheless remain – and coal is clearly among them. Following the conclusion of COP26, you may well have seen headlines about coal prices surging to a 12-year high. I don’t think this should be interpreted as an expression of faith in the substance’s future after the linguistic tweak in Glasgow: it is more indicative of supply and demand dynamics in energy markets.

It does raise a question for investors, though: should we be exiting coal-involved businesses despite their potential to offer returns, even if only over the short term?

We view coal’s role in the energy mix as incompatible with the global commitment, made under the Paris Agreement, to limit the increase in the global average temperature “…to well below 2°C above pre-industrial levels” and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels. I therefore expect coal to be a decreasing part of the world’s energy mix and so, working in the best interests of our clients, I believe it is important to reflect this transition within the portfolios that we manage.

Removing coal from our portfolios does not remove it from the economy

While COP26 clarified coal’s longer-term trajectory and confirmed the essential validity of this position, it did not simplify what we must do in practice today. This is because removing coal from our portfolios does not remove it from the economy. Indeed, since investors began walking away from coal companies, the coal mines have not shut down – they have been acquired by operators focused more on maximising short-term profits. This is clearly an undesirable unintended consequence of divestment policies.

This is why, where investors opt for an index mandate that may include some coal-related securities, we favour active and escalating engagement to ensure no new thermal coal generation is developed, rather than automatic exclusion. This allows us to take into consideration the need for a just energy transition in countries, or regions where there is significant economic dependence on thermal coal power or mining.

Closing generation capacity can be politically and socially complex in coal-mining areas. Supplying local power plants with coal can be a major source of employment and contributor to economic activity. Shuttering generation capacity might also reduce local energy security, if alternatives can’t be installed quickly. This is a complex, political issue. So we need to accelerate the closure of thermal coal plants, while finding the innovative solutions to do so in a manner which protects the communities that depend on them today.

There are ways forward. In Poland, for example, the state has recognised the political nature of the problem and is taking a key role in its resolution; the government published a plan to acquire coal power generation units, as well as lignite mines, from some local publicly traded utilities. Progress on the issue of coal coincided with a re-rating of some of their share prices. Elsewhere, emerging economies in Asia are looking at innovative ways to fund, together with financial institutions, the early retirement of thermal coal plants.

In Germany, we think a similar solution could work in principle. We believe investors should support utility companies in seeking to exit difficult-to-close coal operations, but only where the disposal is to socially responsible, well-capitalised buyers, supported and closely supervised by the state. In our engagement with RWE’s* senior management, for example, we have called for the company to investigate such a transfer.

We were pleased to see RWE’s recent announcement of plans to invest an average of €5 billion per year for the foreseeable future in renewable energy, and welcome its ambitions to expand its green capacity from 25 gigawatts at present to 50 gigawatts by 2030 (almost equivalent to Germany’s entire existing onshore wind power capacity), and hope to see similarly positive developments on its coal division.

We think transfers like those set out above could make RWE and other remaining groups with coal exposure more investable, but only in these public/private partnerships. As I noted, we have already observed that selling to a financial buyer to run the assets down is often not environmentally responsible.

Action versus inaction

This brings me to a broader point faced by all asset managers. Divestment by responsible investors can lead to adverse effects as it changes a company’s shareholder base, which is why we favour engagement in the first instance. Across any number of controversial issues, investors could choose divestment – but this would not resolve the underlying issues. Instead, as with coal, it is likely to leave the issues in the hands of shorter-term investors.

So we must be clear that the choice is not between divestment and acquiescence, but between inaction and action – and inaction is not an option. A mandate to invest responsibly is not an instruction to walk away from difficulty, but a call to action on some of the most difficult challenges we face.

I say that not in hope of our ability to effect positive change as asset managers, but in absolute confidence that we can. On pressing topics from biodiversity to board diversity, I have seen shareholders’ increasing ability to influence corporate decision making. Last year for example, along with other investors we succeeded in adding three new directors to even the mighty ExxonMobil’s* board given our dissatisfaction with the company’s climate and capital-allocation strategy.

This is by no means an isolated example, but these high-profile engagements bolster our efforts elsewhere as boards see that investors are willing to act decisively. Last summer, for instance, we and other bodies joined the Access to Medical Oxygen campaign, which aims to increase access to medical oxygen in low and middle-income countries in the context of COVID-19. We were delighted to see that, less than a week after we stated our clear support for companies taking steps to increase access, Air Liquide* and Linde* – two of the world’s largest suppliers – agreed to collaborate with the COVID-19 ‘Oxygen Emergency Taskforce’ to boost access to medical oxygen in poorer nations. This demonstrates that by being forceful when needed, responsible investors can also be responsive investors as new challenges emerge – and deliver results quickly.

On such matters – from coal and other environmental factors to social and governance risks – the interests of large diversified asset managers and their clients are aligned. The long-term outcomes for both are largely dependent on the health of the global economy, not individual companies. By raising standards across the whole market, especially where engagement can seem unpalatable, we make the whole economy more sustainable and so make returns more sustainable.

This is the critical insight of inclusive capitalism, our vision for putting in place creative ways to enable more people to benefit from economic growth: seeing the feedback loops in the broader economy and acting to ensure they are positive.


*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Michelle Scrimgeour

CEO, Legal & General Investment Management

Michelle was appointed Chief Executive Officer (CEO) of Legal & General Investment Management (LGIM) in July 2019. Michelle has spent her career at major global firms and has extensive asset management experience across investments, distribution, product, operations, risk and control functions. Before joining LGIM, Michelle was Chief Executive Officer, EMEA, at Columbia Threadneedle Investments. Michelle is on the Board of the Investment Association and a member of the FCA’s Practitioner Panel, and is co-chair of the COP26 Business Leaders Group.

Michelle Scrimgeour