In 2020 Brightwell supported the BT Pension Scheme (BTPS) in setting an ambitious 2035 net-zero goal. The goal was tailored to the scheme’s current portfolio and future investment plans.
The scheme set a net zero by 2035 goal as virtually all members will be pensioners by 2034. As a result, the scheme is shifting its investments towards income-generating assets. This created an opportunity to re-allocate capital on a significant scale in a short period of time.
The intention was to limit the impact climate change could have on funding outcomes, providing greater resilience to meeting members’ promised pensions.
At the time of setting the goal, it was recognised that a number of external factors, largely out of our control, would be critical to achieving the ambition, namely the global policy evolution, data availability and methodology challenges, and that progress would be non-linear and unpredictable.
But because of the potential impact on long-term funding, we agreed that they should not be a reason to delay. Having an ambitious goal would push us to do more sooner.
We outlined a four-pillar framework to facilitate the goal.
These were factors within our control, namely: portfolio construction; managers; stewardship; and advocacy. In addition, a governance structure monitored and evaluated progress.
Almost five years on from proposing the net-zero goal, what have we learned?
Over this period, arguably climate change is having an acute impact on the planet. There has been policy progress, such as the Inflation Reduction Act, but policy remains inconsistent across regions and lacking co-ordinated global action.
Data remains a key challenge. There have been clear improvements in the breath, depth and consistency of emissions data.
However, there are issues such as Scope 3 data, methodology changes and weak data, particularly in private assets. Progress on emissions has certainly been non-linear. Impacts from Covid’s economic shutdowns and the subsequent recovery has resulted in a bumpy journey.
Progress across countries, sectors and companies has diverged, exacerbated by different emissions management approaches taken between oil and gas companies in the US compared to Europe.
Geopolitical issues have also played a role. In particular the war in Ukraine shifting the policy focus away from emission reductions to energy security, the cost of living and a more domestically-focused agenda.
At a portfolio level we’ve seen decarbonisation progress ahead of the interim targets set for BTPS. This is a result of our investment managers reducing exposure to higher emitting sectors, as well as portfolio re-allocation effects which have reduced weightings to emerging markets.
However, what’s clear is that a pragmatic and flexible approach is required. Data issues mean managing portfolios explicitly based on current metrics could result in suboptimal investment decisions.
Moreover, a greater emphasis on forward-looking metrics and targets is required – otherwise we’re trying to drive forward while only looking in the rear-view mirror. Strong collaboration with our investment managers has been an important feature of our work over the past few years.
This has been mutually beneficial, and we’ve seen dramatic improvements in their systems, portfolio monitoring and reporting which has allowed for deeper dialogue, greater alignment and improved clarity around how net-zero outcomes can be achieved that complement risk-return outcomes.
Positively, the opportunities to add value from the transition to net zero have opened up with significant progress in the development of investment strategies and capital targeting the transition.
Critically, this has evolved from a focus on new technologies and renewables, to a wider focus that includes provision of capital to higher emitting industries that require significant investment to decarbonise. Allocating to this helps with real world de-carbonisation, albeit it can lead to short-term increases in portfolio emissions. Having a net-zero goal which wasn’t too far into the future meant that we had to grapple with the nuances, implications, and challenges ahead of many others.
We are encouraged that despite weaker than expected top-down global policy progress – clearly hindered by Covid and geopolitics – bottom-up progress by companies and investors has been far more positive.
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