The National Employment Savings Trust (NEST) has identified the three most important environmental, social and governance (ESG) risks in its equity portfolio using a risk management model.
In its first responsible investment report published today, NEST identified the biggest threat was how the companies it invests in treated the environment. This was followed by how they interacted with others and how they led and organised themselves.
The report said: “The potentially devastating effects of climate change throughout the globe will almost certainly affect investment portfolios. This is either through the physical impact of climate change or new regulation to address it.”
NEST said the tool analysed and scored companies based on ESG issues and financial performance – and revealed how much of each area contributes to the risk of each company.
In terms of climate risk, NEST said it was addressing companies’ greenhouse gas emissions by engaging in active ownership, researching investment approaches that reduce exposure to companies with high emissions and fossil fuels reserves, and monitoring the risks at different levels of the investment process.
Since 2014, the £970m master trust has undertaken a project to understand the possible capital market impacts of climate change and examine the issue of stranded assets.
“We captured a wealth of evidence through meeting with government and industry experts,” the report said. “We also gained insight through meeting with academics such as Adrian Gault, chief economist at the Committee on Climate Change, and Timothy Lenton, professor of climate change and earth system science at the University of Exeter.”
In addition to climate change, NEST is also addressing conduct and culture at UK banks, reward and progression in the companies it invests in and the quality of company audits.
NEST invests predominantly through passive index-tracking funds, so instead of actively choosing investments that are hoped to perform better than a given benchmark, and being able to sell their investments if a company is performing poorly, it invests in global equities through an indexed fund.
However, it argued this did not mean it was ‘passive’ with regard to engaging with investee companies.
NEST chief investment officer Mark Fawcett (pictured), said: “We think good quality master trusts have a responsibility to take an active interest in where members’ money is invested and act on behalf of their members as owners of securities. That means considering a broad range of investment risks and opportunities, including issues like the move to a low carbon economy, the way corporations treat the planet and how companies conduct themselves.
“Anyone who thinks this isn’t relevant to long-term wealth creation should consider the billions in fines and damages imposed on large sectors of the banking industry in recent times. Companies that are well run, with engaged and active investors, are more likely to be successful in the long term.”
