Nuance the name of the low carbon game

The £30 billion ($38 billion) Brunel Pension Partnership, the asset pool comprising 10 of the United Kingdom’s local authority pension schemes, is finding significant investment opportunities in private-sector renewables infrastructure.

Speaking at the Principles for Responsible Investment (PRI) Climate Forum, Faith Ward, chief responsible investment officer at Brunel Pension Partnership, referenced “huge deals” and “good quality opportunities” in a strategy which deliberately tilts the infrastructure portfolio towards renewables via global mandates but with an emphasis on the US and Northern Europe.  She noted that the pension fund wasn’t “paying over the odds” despite high prices in private markets and said it would rather not allocate than overpay.

Integrating climate strategy has been a top priority at the new asset manager. The fund is “100 per cent climate aware,” with climate risk integrated across all asset classes. The fund has also introduced a low-carbon index for part of its passive equity portfolio and is looking to create its own carbon metrics to allow clients funds to improve their level of knowledge and encourage strategic decision making.

Rather than divest, Ward runs a nuanced strategy that subtly identifies companies transitioning to a low-carbon economy, frequently drawing on expertise from the Transition Pathway Initiative (TPI) the free, point-of-use tool which assesses companies’ preparedness for the transition, and of which she is co-chair. Ward also noted a prevalence of forward-looking managers with strong due diligence.

“There are a range of fund managers in this space who are very good at recognising low carbon is a good opportunity and a good investment,” she said.

Tough obstacles require tougher due diligence

Under Ward’s leadership, Brunel is carving the same reputation for tough manager due diligence and screening out greenwashing pioneered by the Environment Agency Pension Fund, now under the Brunel umbrella.

“It’s a case of drilling down and seeing if what the managers are promising is demonstrable,” she said.

She added that the process of “kicking the tyres” should be fully integrated into manager meetings – from discussing the investment process and risk parameters to fees. It should also be within the remit of all members of the investment team rather than the preserve of the responsible investment team.

“If carbon outcomes are part of a manager’s pitch, they need to be sure what you are talking about because we will pull them out and it can be painful.”

Obstacles to investing in low-carbon strategies include a lack of data, said Meryam Omi, head of sustainability and responsible investment strategy at Legal & General Investment Management.

Although the data aren’t perfect, she said there were enough for asset owners to invest in low-carbon strategies in the equity and bond spaces, adding listed equity is “a good place to start”.

An elevated conversation

Omi said active strategies could focus on low-carbon integration by stock picking new technologies – or on asset classes such as infrastructure. She warned that investors wishing to benchmark against a main index need “an elevated conversation” regarding what they are benchmarking against to ensure the index is aligned as closely as possible to Paris Agreement goals.

Low-carbon strategies should also be nuanced. For example, divesting from utilities because they use coal could mean cutting out exposure to utilities that are also investing in renewables. She also cautioned against an “obsession” with divesting and reducing exposure to carbon. She noted that this strategy can lead to investing more in other sectors like banks, many of which are financing fossil fuels.

Omi also urged investors to look at how their managers are voting and what they are saying on the big topics.

“A lot of clients don’t dig through” to see how their managers vote and hold companies to account, she said.

CCLA Investment Management, which manages £8 billion ($10 billion) on behalf of the UK’s church and charity sector, has prioritised a reduced exposure to coal as part of its low-carbon strategy. It has signed up to the UK government’s Powering Past Coal Alliance where strategy includes engagement with many of the US and European utilities it holds in its portfolio.

CCLA looks at how these companies are managing the transition, avoids companies that are allocating capital to coal and works with utilities to phase out coal power over time, explained Helen Wildsmith, stewardship director, climate change, CCLA. She also noted companies in the sector are increasingly working together in industry groups to tackle climate change.