Brunel lays down gauntlet with ESG policy

Outlining its new policy to combat global warming, the Bristol-based investment group highlighted four major failures of the global financial sector, including a short-termist approach to risk and return, and asset managers proving reluctant to invest in low-carbon innovation.

The pool also said backward-looking risk models were letting asset owners and members down, and will advocate for the introduction of a “meaningful price on carbon” and the end of fossil fuel subsidies.

Released on Monday, the policy statement evidences the gulf in approaches to environmental, social and governance investing in the UK pensions sector. Where consultants feel that many schemes will only achieve minimum compliance with new regulations on statements of investment principles, Brunel’s new strategy commits it to robust action on policy, product improvement, persuasion, portfolio changes and disclosure.

New pressure on managers over holdings

In stress-testing its portfolios’ resilience to various climate scenarios, the pool’s asset managers will have to rigorously justify any fossil fuel-intensive companies they continue to hold.

Brunel wants to see companies it owns aligned to the objective of limiting global warming to 2C by the end of this century, which requires “systemic change” in finance.

“While we will not instruct managers to exclude certain stocks, this does not mean we do not expect managers to have portfolios with materially reduced climate exposures and to be able to justify any climate controversial holding,” the policy stated.

Listed equity managers should aim to reduce their carbon footprint by 7 per cent a year, taking the pool to 20 per cent below the benchmark, which will also improve by 2022.

Faith Ward, Brunel’s chief responsible investment officer, said she had been disappointed by responses of the financial sector to climate change, as evidenced by the low numbers of responses to the Financial Conduct Authority’s discussion paper on the subject.

She praised steps taken by minister for pensions and financial inclusion Guy Opperman to force schemes to address material risks, and said Brunel will use its influence to “empower” other asset owners and challenge advisers to increase their knowledge.

“We have to make it unacceptable not to take this seriously,” she said. “That is not a reasonable response, to do the minimum.”

Trustee peers called to action

Brunel plans to launch a section of its website dedicated to sharing its expertise in the field, and will promote the work of the Transition Pathway Initiative.

Ms Ward sympathised with schemes facing a lack of competitively priced, truly green products, but pointed to buy-in from Brunel’s managers and encouraging statements from fund giant BlackRock, as evidence that change is occurring.

“Some of the concerns [raised by trustees] are excuses to do nothing,” she warned. “Doing nothing is actually going to be what will cause you more investment risk, but also potentially litigation and charges of breaching your fiduciary responsibilities.”

At least one of Brunel’s asset managers appears prepared to rise to the pool’s challenge.

Mirza Baig, global head of governance and stewardship at Aviva Investors, said: “We strongly welcome the bold climate position taken by Brunel Pension Partnership. The mispricing of climate risk is the greatest market failure in modern capitalism.”

He added: “The climate crisis demands a shift in how markets allocate capital, and asset owners are critical in helping to drive this change.”

The move was also welcomed by campaign group ShareAction, which pressures investors and companies to act on a range of ESG issues.

Campaign manager Lauren Peacock said: “The pool’s commitment to support directly the low-carbon transition points to a recognition of responsibility as an asset owner, not only to protect its investments from climate risk in the short term, but also actively mitigate the risk for future generations.”

Ms Peacock praised the pool’s use of its shareholder rights and its heavy leaning on slow-moving asset managers.

“This ambition is completely appropriate for the level of risk at stake, and aligned with ShareAction’s call to action for the industry,” she said.

“All asset owners should now be scrutinising their managers’ voting record on climate issues and giving mandates to smarter, more responsible asset managers. We fully expect this to become the new normal.”