We're delighted to feature this guest blog post from Faith Ward of Brunel Pension Partnership, providing some insight into Brunel's new Climate Policy, published in January 2020, to set a bold ambition to shape and drive the whole investment industry to prepare for a low carbon future. Faith recently joined Simon Jones for an episode of our podcast Hymans Robertson On... where they discuss the challenges the investment industry faces in responding to climate change. You can listen to the episode here.

Now over to Faith...

When we set about developing our new climate policy we found ourselves going around in circles because we could see how barriers within the financial system - from lack of data to lack of policy support - would thwart and aggravate the achievement of our aspirations.

That is why the central tenet of our new policy is to try to systematically change the financial system.

To help map this out in a clear way we structured the policy around the ‘five Ps’:

• Policy — engaging policymakers to adopt policies such as a meaningful price on carbon and removal of fossil fuel subsidies.
• Products — identifying product areas where there is client demand for more innovative products, and investing in their development.
• Portfolios — challenging investment managers to demonstrate reduced exposure to climate risk and encouraging engagement to put companies on a trajectory to align with a 2°C future.
• Positive Impact — supporting the low carbon transition.
• Persuasion — Engaging with material holdings to persuade them to improve climate disclosure and performance.

The policy also builds on strong foundations. Brunel already conducts carbon footprints of all its listed equity portfolios and, for example, 35% of its first round infrastructure portfolio (as of Jan 2020) to renewable energy funds.

Bringing others with us

As a Pool we are client-driven and so bringing member funds with us on this climate journey was an essential part of the challenge.

We found that one of the effective ways of doing this was by being honest and by sharing the evidence – such as the work done by PRI on the Inevitable Policy Response or by the TCFD – so there was a common base from which clients could develop beliefs and then practical steps.

We also believe that Local Government Pension Scheme pools are uniquely placed to address the finance sector’s failings on climate change, and can utilise the full pool of expertise across the Partnership.

The barriers and how to overcome them

It’s clear that the investment system, and financial markets more generally, are highly regulated with embedded ways of doing things.  So change is not simple.

Just some of the specific challenges we see are an emphasis on short-term rather than long-term, an inadequate number and scale of investable investment products that make a substantive contribution to climate change mitigation or adaptation, and instances of perverse incentives and conflicts of interest through the system (of which subsidies to fossil fuels are one example given the scale of material climate risk).

We decided that the answer to meeting these challenges was not divestment.  We thought long and hard about the divestment issue and concluded that simply giving a manager a list of companies to avoid would not lead to the change that we ultimately require. By doing so, managers would not be motivated to use new data or new tools, or to consider new ways of doing things, which is ultimately the change we want to see. At the root of our climate policy is the idea that we want managers to come up with their own systems, that work for them, but which deliver the end goals of our policy.

Since releasing the policy, we’ve found that managers in general are welcoming of the challenge. We’ve been clear about our expectations and they appreciate that… some are even excited about the opportunity to develop new products and work with us to move the dial on climate.

The role of investment consultants

I firmly believe that investment consultants have an important role to play in building sustainable financial markets too. The agenda for trustees is already packed and we recognise that climate brings in yet another area of complexity.

Investment consultants can help cut through that complexity, and support trustees in establishing firm beliefs, and robust management assessment processes which help them understand the methods and managers that are meaningfully effective.

It’s important that trustees are empowered to act on climate. That is the motivation behind tools such as the $18-trillion asset-owner backed Transition Pathway Initiative (TPI) and it is also a critical part of what investment consultants can do.

I mention TPI because we recently saw the Church of England Pensions Board adopt a ‘FTSE TPI Climate Transition Index’ – a new generation of Index that enables passive funds to capture company alignment to the Paris Climate Agreement. The index embeds forward-looking climate data from TPI – for example it excluded many fossil fuel companies but includes the likes of Shell and Repsol who have aligned their emissions pathway with pledges made at Paris. 

Such products are a step in the right direction but ultimately they are getting around the problem, whereas at the heart of our policy is fundamental attempt to stop markets being distorted and get all stakeholders – from central banks to central government – to rethink what a successful financial market looks like.

Reporting progress

Going forward we recognise that monitoring and reporting on progress is essential to the success of our policy. We are discussing various ways to do this including reporting on the carbon intensity of our portfolios and how our progress influencing stakeholders is going. For example only this month we were delighted that the Pensions Climate Risk Industry Group (PCRIG), an expert group set up by government departments including DWP and the Pensions Regulator, launched a consultation on a new guide to climate-related financial risks for pension schemes – which chimes with much of our thinking.

We are also using tools such as TPI to track progress in high-emitting sectors. For example TPI’s latest ‘State of Transition’ report found that the only 18% of companies in high-emitting sectors have emissions trajectories in line with limiting climate change to 2°C – a slight improvement on 16% last year but still far too few.

That is a timely reminder of the challenges ahead.