Brunel Pension Partnership has achieved its target of reducing the carbon intensity of its active portfolio by 7 per cent a year in time for the UN’s World Environment Day, but smaller schemes saddled with pooled products may lack the clout required to emulate them.
According to Brunel's first report on Responsible Investment and Stewardship Outcomes, published on Friday, the £30bn Local Government Pension Scheme pool also has 35 per cent of its cycle one private market investments in renewable energy, and the Brunel aggregate portfolio has a higher proportion of renewables than its custom benchmark.
The success was attributed in part to the 867 engagements with companies carried out by the pool in 2019.
[Engagement] makes the asset management industry change in a more fundamental way that will benefit all investors
Faith Ward, Brunel Pension Partnership
Laura Chappell, chief executive of Brunel, said: “Our clients have high ambitions for strong returns by investing in a world worth living in, and the Brunel Pension Partnership is proving it can help deliver those goals.”
“This report reflects on a critical year that has seen successful outcomes in a wide range of sustainability themes, from climate change to cost transparency,” she said.
Emphasising the importance of engagement, she added that “partnership remains key to our success, and many of the achievements disclosed in our first report came from working with our clients and asset managers on environmental, social and governance issues.”
Coal still makes up 25 per cent of its energy mix, however, similar to other pension schemes. Pensions Expert reported on Monday on a divestment decision by the Universities Superannuation Scheme, which drew criticism from climate scientists and environmentalist groups for its retention of coal and oil investments.
Asked to respond to similar concerns about Brunel’s coal investments, Faith Ward, Brunel’s chief responsible investment officer, agreed with the sentiment of those criticisms, but pointed out that the current financial system and the way the investment industry operates restricts the pace of change.
“The financial system is not fit for purpose,” she said. “Standard market cap global indices is one of the basics in the investment industry and it’s not fit for purpose if your objective is to achieve less than two degrees warming.”
One proposed solution is to institute a price on carbon, she said. “At the moment the market isn’t fully pricing in that risk because there is no price on carbon, so that externality is being borne by society rather than by companies producing fossil fuels.”
But another reason for not divesting fully from coal was that engagement helps change mindsets, she added, especially among asset managers.
“We felt it would make life too easy,” she said, adding that “what we’re saying is that this is our policy, this is our direction of travel, and you as an asset manager have to be held to account. It makes the asset management industry change in a more fundamental way that will benefit all investors.”
Small schemes need to be empowered to make changes
While a £30bn-sized pool like the Brunel Pension Partnership — which is a collaboration of 10 LGPS funds — enjoys ample opportunity to engage with and influence companies, others, particularly smaller schemes, are hamstrung by a rigid regulatory environment.
Leanne Clements, project manager of the Association of Member Nominated Trustees Red Line Voting Initiative, told Pensions Expert that a market failure exists within the fund management industry.
“The 2020 Stewardship Code requires fund managers to explain how their assets are being managed in alignment with client’s investment and stewardship policies, and if not, to explain why,” she said.
But in pooled funds, it is typically managers who set voting policies, and schemes do not technically have the right to vote their shares independently. While “fund managers may be willing to accommodate larger schemes — especially those with strong environmental, social, and governance credentials such as Brunel — with their bespoke requirements on an exceptions basis”, Ms Clements said, “the reality is that fund managers do not have the resources in their ESG/stewardship teams to accommodate the different policies of all their clients”.
In too many cases, fund managers use what resources they do have on crafting their own ESG and stewardship policies rather than implementing the policies of their clients, she argued.
“In my view, this represents a missed opportunity on the part of the fund management industry,” she said. “Given that the regulatory push is so obviously pointed towards asset owners becoming more active stewards of their investments, fund managers could look at this as an opportunity to brand themselves as being willing to partner with asset owners to achieve this goal.”
“Fund managers should be rewarded for demonstrating a willingness to work with their clients to achieve their stewardship objectives,” she added, and “not putting clients in the difficult position of accepting policies which may not be in alignment with their own investment beliefs.”
USS divests from coal, tobacco and weapons manufacturers
The UK’s largest pension scheme has announced it is to divest from selected coal, tobacco and weapons manufacturers, following years of campaigning by members and activist groups.
Ask questions, demand answers
The limited powers trustees of small schemes do possess lie in their ability to ask questions to their fund managers, according to Piers Lowson, director at Baillie Gifford.
“Assuming that a small scheme is investing in a pooled fund,” he said, “there are a series of questions that trustees should be asking of their manager with regards to how they engage with the companies with which they invest.”
Asked to give advice to trustees of schemes smaller than theirs, Brunel’s Faith Ward concurred. “Don’t assume managers will do it without being asked,” she said.
“More managers are being more proactive, but at the end of the day they do look to their clients to set the framing. Ask them what they’re doing to address this issue — make it part of holding them to account.”
