BT Pension Scheme sets ambitious 2035 net-zero goal

The new commitment by the BT Pension Scheme should limit its long-term exposure to the risks of climate change by reducing carbon emissions from its portfolio.

The policy aligns BTPS with the Paris Agreement goals to keep global temperature rises within 1.5C of pre-industrial levels by 2050.

Commenting on the move, Morten Nilsson, BTPS Management’s chief executive, says: “As the global economy looks for ways to recover from the impact of the pandemic, we have an opportunity to do things differently. Over the next 15 years, the scheme will be reinvesting the majority of its assets and, as we look to deliver the best returns, we must not waste this opportunity to support a cleaner and greener future.”

Members are engaged with ESG, care about investment choices, and how those connect to long-term outcomes. We’ve seen a number of questions from members received by trustee boards that seek to explore how their scheme is dealing with the challenges posed by climate risk

John Belgrove, Aon

He admits it will be a challenge: “While we have relatively good data on our public equities and corporate bonds, coverage of Scope 3 emissions in some sectors and data for other asset classes is more limited.

“With this in mind, we could have chosen to sit on our hands and wait for the depth and quality of data to improve, but having decided that climate change was a major risk for the scheme, and given the size of the scheme’s assets, we concluded that we need to get started.”

BTPS’s current equity and corporate bond holdings have total emissions of approximately 2.1m tonnes. This is across Scope 1–3 emissions, which cover direct emissions, emissions from power purchased, as well as goods or services bought and sold by the company. 

BTPS claims its listed equity portfolio and corporate bond portfolio are respectively 40 per cent and 60 per cent less carbon intensive than comparable indices. 

Mr Nilsson notes: “Within our existing portfolio we know roughly 20 per cent of our investments contribute to 80 per cent of portfolio emissions. This concentration of emissions makes it easier to change the overall emissions profile of the scheme — small changes to the highest emitters in the portfolio have a disproportionate impact on our emissions footprint.” 

By 2035, almost all of the scheme’s members will be retired, which BTPS says will make it easier to implement the changes that will revolve around portfolio construction, mandate design, manager selection, stewardship and advocacy.

The company believes that engagement, rather than disinvestment, is the best way to push for corporate change, although it will ultimately divest from companies that fail to curb their emissions. 

BTPS has also joined the Institutional Investors Group on Climate Change’s Net Zero Investment Framework and the Net-Zero Asset Owner Alliance. 

Commenting on the targets, Stuart O’Brien, partner at Sackers, says: “Fundamentally, trustees need to keep asking themselves ‘why’ and ‘how’ — why adopting a target will assist in delivering members pensions and how it will do so in practice. These are big questions.”

Green trajectory is increasingly common

BTPS is one of the first private sector, single-employer schemes to make such a move, following the example of several multi-employer and public sector plans.

“In the [Local Government Pension Scheme] space, along with South Yorkshire, a number of funds are currently assessing their trajectory,” notes John Belgrove, senior partner at Aon, citing the £21bn Strathclyde Pension Fund’s consideration of a net-zero target, having already adopted the Task Force on Climate-related Financial Disclosure’s framework previously.

“More generally, I expect formal adoption of TCFD disclosures by large asset owners to be an accelerant of formal net-zero pledges,” Mr Belgrove adds.

Aviva’s defined contribution business, Nest, Cambridge University and the Church of England pension funds are also in the vanguard on climate change, with the West Midlands Pensions Fund also looking to become greener.

Members are also beginning to engage on this issue. A February 2020 survey of 8,500 of the 290,000 BTPS members found that 74 per cent said they expected the scheme to continue taking environmental, social and governance considerations into account. Sixty-five per cent said they expect BTPS to use its investments to make a positive impact on the environment and society.

Mr Belgrove is not surprised: “Members are engaged with ESG, care about investment choices, and how those connect to long-term outcomes. We’ve seen a number of questions from members received by trustee boards that seek to explore how their scheme is dealing with the challenges posed by climate risk — and how the pension scheme is investing to protect and enhance its members’ outcomes accordingly — for example, Make My Money Matter.” 

Impact of the law

Schemes may also be adopting net-zero pledges because they can see the direction of travel in government policy, evidenced by a string of new regulation aimed at harnessing pensions for sustainable aims.

“Trustees and their asset managers are seeing fast-paced changes in law and regulation as part of the ongoing drive for pension schemes to consider ESG issues when making investment decisions,” says Simon Borhan, managing associate at Linklaters, citing the new requirement to include ESG policies in trustees’ statements of investment principles.

He sees further changes on the horizon both in legislation, such as the pension schemes bill, and non-statutory guidance.

He also points to a government consultation on the regulations to be made under the bill, which “will include obligations on large schemes with assets in excess of £5bn and authorised master trusts to have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities from October 2021”.

This would then be rolled out to schemes with £1bn or more in assets from October 2022.

The costs of monitoring could be significant, however. Mr O’Brien warns: “The Department for Work and Pensions’ consultation on climate risk governance and reporting suggests that for schemes in Scope, regulations will require calculation and disclosure of at least one emissions-based metric (such as weighted average carbon intensity) and one non-emissions-based target, as well as setting and monitoring against an appropriate target.

“The consultation proposes quarterly monitoring, which could be material in terms of cost and governance,” he adds. 

Mr O’Brien says a crucial factor in the progress of ESG investing will be whether trustees are expected to bear monitoring costs directly on an individual basis, or whether managers will be expected to provide reporting across their client base: “The promised consultation on new rules by the Financial Conduct Authority in 2021 that will apply to managers is going to be all-important here.”