Under COP21, signatories agreed to limit global warming to a maximum of 2°C during the current century and to reach carbon neutrality (net zero emissions of greenhouse gases) by the end of the century.
We asked Adam Mathews, director of ethics and engagement at the Church of England Pensions Board and co-chair of the Transition Pathway Initiative (TPI), to explain how the Church is re-allocating main passive equity assets and the role that the TPI and FTSE Russell play in this with the launch of FTSE Russell’s new generation of climate indexes.
The Church of England Pensions Board decided to reallocate all its main passive equity assets toward a portfolio tracking the new FTSE TPI Climate Transition Index. What caused you to change your investment approach?
Adam Matthews: We’ve long recognized climate change as a systemic risk to our fund, both on a financial and an ethical basis.
Together with other asset owners, we developed the Transition Pathway Initiative (TPI) 2017. That initiative helped give us insights into where the greatest risks were amongst our existing equity holdings. Since then we have been working to integrate TPI’s insights into the way we invest. TPI now guides our corporate engagement, our proxy voting, the way we assess and engage with our active public equity asset managers, and we wanted to bring TPI into the way we allocate capital on behalf of our beneficiaries.
Our objective was not just to meet our fund scheme members’ interests, but also to provide a helpful route for other pension funds wanting to adopt a similar approach.
How has the TPI helped support your investment decision-making?
Adam Matthews: We developed the TPI in conjunction with our data partner, FTSE Russell, and the London School of Economics’ Grantham Institute, which provides research input. It was really important for us to have both independence and academic rigor at the heart of the initiative.
The TPI covers the major emitting companies across 15 carbon-intensive sectors. It helps us analyze if a company is well-managed, and whether its management team has made actual commitments to reduce carbon emissions, whether those emissions are classified as Scope 1, 2, or 3[1].
The TPI has brought such insights to the wider investment community, and into the public domain: TPI’s work has been undertaken in a transparent and accessible way and in key energy / carbon intensive sectors is setting the benchmark for corporate climate disclosure. This is evidenced by the extremely high level of response received from companies to TPI assessments.
Applying TPI insights to passive investment portfolio, as we have done, was the logical next step.
What were your criteria when choosing external partners for the project?
Adam Matthews: We were looking for competence, market insight and the ability to help us address the risks and investment opportunities presented by the low carbon transition.
What feedback have you received—both internally and externally—in response to your recent investment policy changes?
Adam Matthews: We’ve had a huge amount of really positive feedback and, to date, nothing negative.
There’s been a great deal of interest from many other pension funds in how we have developed the index as well as from companies in how they are assessed. We have also received very positive support from policymakers, such as senior representatives of the Bank of England, UK government ministers and members of the United Nations’ climate negotiations.
We often field questions about why such an approach hasn’t been taken before, specifically when it comes to one of the really innovative aspects of the index, the embedding of forward-looking climate change data into our investment portfolio.
As I say there has been a lot of media coverage and interest from publicly listed companies themselves.
Although our initiative was notable for absolute size of the portfolio shift involved, companies can see that it was indicative of the way responsible investors are going to allocate capital in future. Specifically, they recognize that investors are going to take active steps to bring their equity holdings in line with their understanding of transition risk.
How did you choose the FTSE TPI Climate Transition Index as the new benchmark for your passive equity portfolio?
Adam Matthews: The creation of the new index was a collaborative process. We needed to create a product that met our financial responsibilities to our scheme beneficiaries. And when designing the index, FTSE Russell were hugely responsive to our requirements.
Our trustees were heavily involved in the evolution of the approach we sought through the index and had previously been as involved in the development of TPI. This meant that when we eventually presented the outcome of our discussions to the Church of England Pensions Board, the trustees had confidence in the processes we’d been through, the partners involved, the application of our objectives and the real-world impact we were seeking.
There are five parameters to the FTSE TPI Climate Transition Index
What do you expect the long-term impact of your decision on scheme beneficiaries to be?
Adam Matthews: Fundamentally, we’ve undertaken the changes to our pension scheme’s equity investment allocation because we wanted to mitigate the risks of investing in companies that aren’t going to succeed in the low-carbon transition. Equally, we wanted to ensure we were invested in those companies that are best-placed to benefit from the transition. We also wanted to send very clear stewardship signals, indicating our expectations that companies need to change their behaviour and be responsive and that if they do so investors such as us would stick with them through a challenging transition.
Our sense is that the index manages to bring all those objectives together. We feel that, over the long term, this fund will position our investments well and ensure that our beneficiaries are protected. They will be exposed—in a positive way—to those companies that are best placed to navigate what is going to be a hugely disruptive and challenging market environment.
Have the coronavirus pandemic and the recent dramatic fall in the price of oil impacted your thoughts in this area, and if so, how?
Adam Matthews: In the near term, questions of public health and how to overcome the pandemic are at the top of people’s minds. But unquestionably, the impacts of COVID-19 are going to play out in those sectors that were previously very dependent on people travelling or undertaking other energy-intensive activities.
Here, things have changed radically in a very short space of time. Is this a temporary shock or can we expect longer-term, structural changes? My sense is that, for sectors like aviation, freight, automotive and shipping there are now fundamental questions about future business models.
What will the role of oil and gas companies be in supporting those business models? We may end up moving to a low-carbon path much more quickly than anyone had anticipated.
All this brings sharper focus to the need to deal with climate change as part of the strategy for economic recovery. And here I’m optimistic. I think such a policy shift is going to be possible across significant regions of the world.
For more insights on climate investment strategies, sign up to our blog
[1] Scope 1 covers direct carbon emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company's value chain.
© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.
