Do you feel the 2020 deadline you’ve set yourself is achievable?
We felt we had drawn a line in the sand and wanted to engage with companies by saying: “Well you’ve got five years to show that you can make progress and then we’ll have a look at where everything’s at.” We felt the five year time horizon was quite a healthy one for businesses to really think about this and how they can embed impacts of climate change into their own business strategies. It gave them a reasonable timeframe to look at it without us automatically saying, “Okay, we’re going to disinvest you” as a first response. We have reserved the right, however, when we are reviewing their progress in 2020, to use exclusions for the first time if we feel some companies aren’t really making sufficient progress and therefore present a financial risk from their inaction.
So does that mean there will be no change in management until that time?
We don’t expect there to be any changes. That’s partly because we have been embedding this within our thinking for such a long time that most of our managers consistently best their benchmarks when it comes to carbon emissions. Overall we have reduced our active footprint by 44% since we started measuring it in 2008.
Head of pension fund management Dawn Turner was quoted as saying that not reducing fossil fuel investments would be a breach of your fiduciary duty to members. Is that the case?
What we have said is not addressing your fund’s fossil fuel exposure, in light of the evidence emerging and recommendations from the Intergovernmental Panel on Climate Change and the International Energy Agency, who suggest that 80% of fossil fuels need to stay in the ground if we are to keep global mean temperature increase to less than 2ºC, would be a clear breach of the long term financial interests of members. It is about looking at that exposure and trying to reduce it, but it is more subtle than just disinvestment. We do feel that the market will naturally decarbonise and the engagement is a core part of then that is entirely appropriate. What we are concerned about is that not enough asset owners and pension funds actually do know what the level of risk is.
Is this part of an ongoing strategy, then?
A big decision last year was to move our entire market cap index, which is about 10% of the fund, to work against the MSCI Low Carbon World. That decision was made after we did the carbon footprinting and fossil fuel exposure of the fund in 2013, what that showed was the majority of the fossil fuel exposure and high carbon emissions was actually in our passive portfolios. And while we feel it is appropriate to hold some oil and gas companies and extractive companies, we feel that climate risk is something you need to actively manage. We felt we didn’t want it sat within our passive portfolios. The important thing for us was the MSCI low carbon benchmark through optimisation, reduces the carbon emissions by 80% and fossil fuel exposure by 90% of the index whilst staying within 30 basis points tracking error. So it is achieving quite a lot of impact in terms of climate change with minimising the financial implications. The remaining part of our passive portfolio, factor drive indexation, will change to incorporate carbon risk within the next 12 to 24 months. That will put the fund and our strategy in a pretty robust position. And it would be fair to say we have been literally inundated with providers wanting to look to shape and come up with solutions for that challenge as well as lots of interest from other pension funds, so I think that is
another area that people are looking for solutions for.
