Why Nest is factoring in climate change

This statement makes explicit the risks of both the physical impacts of climate change and the policy measures that will be needed to tackle them. By signing, Nest agreed to take concrete steps to reduce greenhouse gas emissions and build resilience against climate change.

The fund should reap the benefits of a shift to a low-carbon economy as well as manage the risks of investment shocks

Based on extensive research over the past four years, it is our fiduciary duty on behalf of our members to take the kind of action outlined in the pledge.

That is why last month we made a major development in our investment approach. We became the first investors in a new climate-aware fund managed by UBS that we helped develop and design to meet our members’ needs.

This move will help protect our members’ money from the known risks of climate change while allowing them to benefit from the opportunities of a greener future. We are sending a strong message to the companies we invest in that we expect to see measurable progress towards preparing for a future where energy is increasingly generated by renewables.

A significant building block

The UBS Life Climate Aware World Equity now makes up a significant building block in Nest’s fund of funds structure. We have initially moved 20 per cent of the assets in our UBS global developed equities fund across, representing more than £130m and 10 per cent of our overall assets under management.

The new fund aims to deliver returns broadly in line with the FTSE Developed Index, but applies a positive climate tilt to favour companies identified as vital to combating climate change. It applies a negative tilt to reduce investment in those companies that are heavy carbon emitters, have fossil fuel reserves or are not making the sorts of change needed to be on track to keep rises in global temperatures below 2 degrees.

Crucially, it allows us to integrate our voting and engagement activities on those companies that have most to do to prepare for a lower-carbon world.

This approach looks ahead to how companies are positioned for the transition to a low-carbon economy. So the fund, which has a 65 per cent higher exposure to companies generating renewable energy than the FTSE Developed index, should reap the benefits of that shift as well as manage the risks of investment shocks if carbon reduction regulation increases or demand for fossil fuels falls.

As responsible long-term investors on behalf of our members we cannot afford to ignore climate change risks, and we have committed to being part of the solution.

Mark Fawcett is chief investment officer at mastertrust Nest