Merseyside goes green with £400m multi-factor equity allocation

MPF selected the All World Climate Balanced Comprehensive Factor Index last year to support the implementation of its climate risk strategy within the fund’s passive equity portfolio.

The £400m allocation sees it become the first client of a new fund tracking the index, managed by State Street Global Advisors.

Plans were outlined at the London Stock Exchange Group office last week where Owen Thorne, investment manager at the MPF, said: “The fund’s investment objective is to align decarbonisation goals, responsible investment policy and activities with the goals of the 2015 Paris agreement on climate change."

Thorne added: We want to look at decarbonising the riskier part of our investment strategy, which we consider to be our equities exposure.”

We want to look at decarbonising the riskier part of our investment strategy, which we consider to be our equities exposure

Owen Thorne, Merseyside Pension Fund

The £8.6bn MPF is part of the Local Government Pension Scheme, and Wirral Borough Council is the administering authority. According to its 2018 annual report, there are 49,151 active members, 38,176 deferred and 50,160 pensioner members in the scheme.

The Merseyside Pension Fund alongside Greater Manchester Pension Fund and West Yorkshire Pension Fund collectively form the Northern Pool.

"In order to grow the assets over time, like most pension schemes we are invested in equity markets. What we are doing with this low-carbon strategy is taking a view around how we reduce the amount of that climate risk in such a way that it still enables us to earn better than or in line with the market rate return – but reducing the risk, the volatility of that return, through a passive strategy,” said Thorne.

“We are conscious that risks from climate change challenges threaten the likely long-term returns that we can expect to earn from being invested in these markets,” he said.

Thorne added: “This is not about taking an active bet... this is about saying, 'We are invested in these markets for the long term' – it’s an important part of our strategy.”

MPF is the UK’s fifth-largest local government pension scheme and manages £9bn of assets on behalf of Merseyside’s public sector employees and pensioners.

Door open for schemes to join Merseyside

Ana Paula Harris, managing director and global head of equity portfolio strategists at SSGA, confirmed that Merseyside's allocation is to a pooled fund, and that it will therefore be open to other schemes.

“I cannot think of a topic that is more pressing at the moment than climate change... investment decisions like Merseyside's are going to be a key part of that collective response that we are going to have to make,” said Harris.

Harris noted that changing consumer attitudes are forcing business to engage with the environmental agenda, and that there is a growing trend among asset owners to integrate ESG considerations into their investment strategies and approach.

Aled Jones, head of sustainable investment, EMEA at FTSE Russell, said at the launch event: “As global efforts increase to address climate change, more visible incentives will be seen to reduce exposure to the liability side, which is carbon, and increase exposure to the green economy.”

ESG and climate concerns now inform a key strand of the MPF's strategy for managing investment risk.

Richard Folland, co-founder and partner at Sustineri, an advisory company that helps investors to implement low-carbon strategies, has been examining how MPF can strengthen and future-proof its investment as well as long-term sustainability plans.

He said: “There is a lot going on out there if one looks at the wider backdrop, whether it be the Paris climate agreement, the [UN] sustainable development goals, the Task Force on Climate-related Financial Disclosures."

Folland noted that the UK is seeing pressure applied by a range of different government ministries including the Department for Work and Pensions and the Ministry of Housing, Communities and Local Government, which is responsible for administering pensions for local government schemes.

Guidance from the Pensions Regulator also requires pension funds to produce a statement taking into account financially material factors.

ESG offers opportunity alongside risk

Issues such as climate change and the environment are becoming increasingly financially material, as evidenced by the increasing number of local authority schemes incorporating ESG into their equity exposures.

Helen Price, assistant investment officer at the circa £30bn Brunel Pension Partnership, said that while pools' formulate their own strategies, they are sharing insights on ESG.*

“We believe collaboration is important across the LGPS with our peers in addition to the investment industry on numerous topics, including responsible investment risks such as climate change,” said Price.

For some schemes, adapting to ESG issues will require them to revisit their investment values and philosophy. “Pension committees are beginning to realise that they need to reconnect with how their capital is employed, by taking a long-term perspective and by becoming more intentional and responsible investors,” said Karen Shackleton, founder of Pensions for Purpose, an organisation that aims to promote understanding of impact investment.

Shackleton noted: “We are seeing exciting developments from the best-in-class pension funds around climate change, responsible investing and the move towards impact investment. These can then be translated into an investment strategy, which in turn can be rolled out across all asset classes.”

However, research conducted in November 2018 by law firm Pinsent Masons found that some of the largest pension funds in the UK had failed to integrate climate change risks into their investment decision-making.

The report surveyed 43 UK pension fund managers with £479bn in assets under management on their approach to sustainability. The research found that only 5 per cent of funds had a climate change policy.

Ralph McClelland, a partner at Sackers, a specialist law firm for pension scheme trustees, said: “This sort of information isn’t in the public domain, but in my experience, many schemes – particularly small schemes – do not yet have a stand-alone policy on climate change, though they may have governance in place to address environmental, social and governance risks generally.”

Policy pressure ramping up

Most UK trust-based pension schemes are required to have a statement of investment principles, which is formulated by the scheme’s trustee. In September new requirements to specifically address ESG risks including climate change were confirmed.

“We are seeing some evidence that this is prompting trustee’s to revisit, refresh and update their current policies. At the same time, we’re beginning to see more managers offering some ESG integration, so it may be getting easier for pension schemes to do more in this area,” said McClelland.

“As long as trustees’ are acting for a proper purpose, there’s nothing in the law to prevent pension scheme trustees taking an active approach to climate risk management, and many schemes do just that,” he added.

*This article has been amended to clarify reporting of statements by Helen Price.