The UK’s largest pension fund, USS, is going to spend more of its energy in engagement with government and corporates than producing emissions reports.
Between 2019 and 2023 University Superannuation Scheme, USS, the £78 billion pension fund for employees in the United Kingdom’s university and higher education sector reduced the carbon footprint of its portfolio by 35 per cent.
Well-documented strategies include tilts to climate-friendly assets, reduced exposure to companies that are poorly positioned to adapt, and direct investments in renewables, all carefully backstopped by the complex and time-consuming process of measuring and reporting emissions across the portfolio.
Yet global emissions have climbed relentlessly higher.
In an interview with Top1000funds.com, CEO of USS Simon Pilcher says the carbon reporting burden is distracting from more useful strategies like engagement to encourage others to act as long-term players. USS will continue to measure its carbon emissions and plans to produce at TCFD report this year. But going forward the investor will spend more of its energy in engagement with government and corporates than producing reports.
“Our portfolio has decarbonised significantly, but to put it bluntly, it’s not made a jot of difference in the real world and our focus is on a real-world impact rather than window dressing of our own portfolio,” says Pilcher.
Time to step up the pressure
USS’s decision to divert time spent reporting to ratcheting up pressure on policymakers coincides with the link between carbon, temperature rises, and extreme weather becoming one of the most worrying and urgent investment themes for the universal owner and long-term investor.
Pilcher says a hot world in 20 to 30-years- time will result in “horrible returns” for pension funds that own small slices of everything and are unable to sidestep or diversify a way around. “All assets will struggle in a four degrees world, and we have realised in the last 12-18 months that we need to seek to influence not just the stocks we choose, but the environment in which we all operate.”
Policy change is a precursor to meaningful corporate change and USS wants to help create a landscape and economic framework within which corporates and consumers can choose lower carbon options. It’s not worth expending energy trying to persuade companies to do the right thing when the economic incentives remain so strong to continue to do the wrong thing, Pilcher continues.
“We encourage long term approaches, but it is daft to ask companies to do things that make little economic sense as they won’t do it. We need an environment where it makes economic sense to do sensible things, and one that removes the financial barriers to doing sensible things.”
Pilcher turns to the barriers USS has met battling to green one of its own infrastructure assets to illustrate how the UK’s planning system actively encourages companies to do the wrong thing.
The UK needs more electric vehicle charging infrastructure if the country is going to successfully increase uptake of electric cars. Yet there is currently a 10-12 year wait to get green power to motorway services like USS-owned Moto, the country’s largest motorway service station network. “We need a planning regime that will speed up the connection of offshore wind to the grid and the delivery of electricity to where it is needed.”
Elsewhere he points to energised colleagues who want to install air source heat pumps in their home but have given up because local authority planning makes it impossible.
Will they listen?
Pilcher reports a strong willingness from the government to listen and an understanding amongst policy makers of the need for long term investors to have policy certainty to deliver long term and sustainable benefits. Describing the conversations as constructive, sensible and calm, he says the government grasps that open pension schemes like USS offer real scale and draw international investors interested in partnering with them to the UK.
“Asset owners like USS don’t have much control but can and should talk to and encourage policymakers to create a landscape and economic framework within which corporates and consumers can choose lower carbon options. It may have got harder in North America, but that doesn’t mean the rest of us shouldn’t continue to speak calmly on this issue.”
However, he’s under no illusions that the absence of long term thinking makes achieving change difficult. Politicians are focused on four-to-five year re-election cycles which are now backdropped by geopolitical uncertainty and the prevalence of more extreme political positions in the US and across Europe that would not have been popular 20 years ago.
Corporates and asset managers are similarly focused on the short-term. Corporate management turns over every 5-10 years and companies are reluctant to take actions that will cost them money and risk shareholder discontent. Investment managers are also focused on making short-term profits, he says.
That lack of alignment with asset managers is one reason USS manages over three quarters of its assets internally. Managing assets internally allows for a clarity of investment strategy that is hard to replicate via a third-party mandate, he says. “We are not interested in market indices. We are interested in assets that meet our needs.”
It is also materially cheaper to manage private assets in house.
Around 10 per cent of the allocation to private assets is managed externally yet that 10 per cent allocation costs the same as it does managing the other 90 per cent of the portfolio – not only the other 20 per cent invested in private assets that are managed internally, but all the public assets in the portfolio, some of which are also externally managed.
“It gives you a feel for how much better value it is to do it in house,” he says, “When we look at the value to our members, we think our model is strongly aligned to our members needs.”
Testimony to his belief in internal management, USS will build out the 75-person investment team with another ten hires over the next three years. He has no plans to build out the allocation to private markets any further.
Pilcher says the portfolio is prepared for the shift in trade flows and end of “peak trade,” and has gradually moved to reflect this long-term structural reality to protect the portfolio. Last year the fund increased levels of inflation protection in the scheme by buying inflation linked bonds in the UK and US. Meanwhile higher interest rates have helped USS swing from deficit into a £9 billion surplus.
