The Environment Agency Pension Fund’s chief responsible investment and risk officer Faith Ward talks to Chris Panteli about how the scheme intends to address climate risk
Last October the Environment Agency Pension Fund pledged to become the first scheme to run its assets in accordance with the UN-agreed principles of preventing global temperatures from rising by more than 2ºC. The move will see the £2.9bn scheme cut its exposure to coal by 90% by 2020 and reduce its exposure to oil and gas by half.
Can you talk me through how you aim to achieve the plans announced last year and the process which lead you there?
The truth is we don’t actually have all the answers yet on that one. We were a partner in Mercer’s Investing in a Time of Climate Change study and that analysed our whole fund, and set it against four different, but possible, climate change outcomes. What that demonstrated was that we are actually in a robust position in terms of those scenarios; we are probably one of the most resilient
funds out there in terms of having taken action and integrated the climate risk our thinking over the years. However, that is quite different from actually keeping within two degrees, which is the scenario that they call ‘transition’. This scenario enables the fund to perform well financially and enables us to see at a strategic level that fulfilling the 2ºC objective was completely compatible with our fiduciary duty. We started to embed it in terms of how we manage the whole fund.From the top down, we looked at it strategically across all of the asset classes, the countries and sectors and have made some strategic allocations to investing positively to a low carbon economy. From the bottom up, we have limited our holdings in some of the most carbon intense companies, but from a financially-driven way of dealing with it. And this is all complemented with engaging and supporting those companies and funds that are actually changing what they are doing to respond to the challenge.And so while we think all these different pieces are contributing to staying within two degrees, whether the sum of the parts can actually withstand external scrutiny as fulfilling the two degrees measure is definitely the biggest challenge we need to meet. We don’t exactly know what a 2C investment strategy looks like yet, but what we do know is we want to be active participants in answering that question. Because we think it is a question that needs to be answered not just by our fund but more broadly by the whole industry.
How do you measure climate risk and how is that actually translated into the portfolio?
Well I think there aren’t any single measures yet for climate risk when you look across the entire portfolio, across all asset classes. We use things like the Mercer research, which looks at what the impacts might be from a strategic asset allocation perspective and what the sensitivities are through different scenarios and what financial impacts that might have. That gives you a helpful element of translating that risk at a strategic level. We use carbon footprinting on all our equities and our active bonds to look at the risk exposure from greenhouse gas emissions. We feel that is the area through either carbon pricing or other regulations which will have a financial impact. But I don’t think there is one single measure, it is a case of being able to see how do we assess it for each asset class and try and build that picture over time.
