By David Cox, Deputy CIO and Head of Listed Markets
Asset owners and asset managers play a crucial role in helping reorient the global economy towards a low-carbon future. But whether we succeed in the fight against global warming will not be known for decades. How can we translate a high-level policy, such as the Paris Agreement goal of achieving net-zero greenhouse gas emissions by 2050, into the measurable investment objectives that asset managers require? For Brunel Pension Partnership Limited, one of the UK’s eight national local government pension scheme pools, there is no single answer – but there is the odd game-changer.
Brunel brings together the £40bn investments of 10 like-minded pension funds: Avon, Buckinghamshire, Cornwall, Devon, Dorset, Environment Agency, Gloucestershire, Oxfordshire, Somerset and Wiltshire.
In November, during the COP26 Glasgow summit, Brunel announced it was transitioning more than £3bn to index funds run by Legal & General Investment Management, tracking new FTSE Russell Paris-aligned benchmarks (PAB) (FTSE EU Climate Benchmarks Index Series | FTSE Russell) that it had helped to develop. FTSE Russell’s Paris-aligned benchmark series meets the requirements of the EU’s Paris-aligned climate benchmarks by achieving a 50 percent reduction in carbon emissions over a 10-year period. It also goes a step further by integrating forward-looking metrics and governance protections from the Transition Pathway Initiative (TPI). TPI provides assessments of how the world’s largest and most carbon-exposed companies are managing the climate transition. Exposure to any given index constituent within the FTSE Russell Paris-aligned benchmark series rises or falls according to several exposure objectives, covering fossil fuel reserves, carbon reserves and green revenues, as well as forward-looking alignment with Paris goals.
Integrating a responsible investment policy into the pension scheme’s strategy and objectives is a process of continuous improvement. We’re really fortunate that we’re in a position where our clients—the ten local government pension schemes within Brunel—have a very long-term outlook. However, as we work through the outcomes we’re looking for, it’s about understanding the risks we’re taking, but also the opportunity set and how the net-zero transition will affect it. We’ve always engaged actively with the companies we hold within our portfolios - we don’t impose blanket bans on the energy or automotive sectors, and nor should we. We need to be active shareholders to ensure we achieve the net-zero transition. Otherwise, we may not get there.
A naïve approach to building a responsible investment portfolio could lead asset owners astray. Banks operate from offices and can buy their energy from renewable sources, so they look very green. But a bank may be a very large financier of fossil fuels and it may actively promote carbon-intensive activity. So we always need to return to our assumptions and to test those assumptions. We collaborate actively with the experts at FTSE Russell who run the data behind the indices, as well as with external academic experts. This helps us continuously refine our investment processes.
To give another example, applying the same decarbonisation constraints to a portfolio of developed and emerging market equities might result in perverse outcomes. That is because, for historical reasons, different countries and different industries are likely be at very different points in the net-zero transition. Asset owners must manage the resulting diversity. We have to transition in a just way. We cannot just say ‘let’s just turn off anything bad and see what happens’. In a country like the UK with relatively low gas and coal usage, that approach might work. But if you go to Vietnam, they would not have electricity if we took that approach. You cannot just approach emerging markets from a Western, or developed market viewpoint.
This realisation doesn’t mean Brunel relaxes the climate risk goals it sets its benchmark designers and asset managers. The pension plan has a stated goal of decarbonising its global listed equity portfolio by at least 7 percent a year. Having the right mindset and a commitment to openness are just as important as setting numerical goals.
The transparency of our strategy and underlying positions is incredibly important. We need to be clear about the outcomes we are looking to provide and how we are looking to provide them. And we integrate responsible investment across everything we do. To assist in our self-monitoring process, Brunel publishes an annual Responsible Investment and Stewardship Outcomes report, in which it goes into detail about our performance against its stated goals.
Our approach is built on three pillars. These are to integrate sustainability criteria into our operations and investment activities, to collaborate with others across the industry and support effective policymaking, and to be transparent in our activities. These three pillars underpin our operations, providing a bedrock for our team, our clients and our managers.
In manufacturing and technology, continuous improvement—a focus on increasing the effectiveness of an organisation to fulfil its policy and objectives—is now a standard business approach. The Paris-aligned climate benchmarks underlying Brunel’s new £3bn portfolio are designed in a similar way. As new data on climate change becomes available and as the scientific evidence deepens and improves, the benchmarks’ in-built flexibility will allow them to be upgraded as well.
Subscribe to our blog.
© 2022 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.