The Border to Coast Pensions Partnership has warned it is prepared to vote on the future boardroom leaders over environmental, social and governance matters, as it publishes its net zero strategy.
The pool, which manages the assets of 11 Local Government Pension Scheme funds — which together pay more than 1mn pensions — published its ‘Net zero roadmap’ on October 5. The report laid bare the challenges of measuring carbon emissions for assets beyond equities and fixed income.
Border to Coast currently engages with companies responsible for 73 per cent of its financed emissions. It aims to lift this to 80 per cent by 2025 and 100 per cent by 2030.
“Under certain circumstances we will vote against individuals,” Border to Coast chief executive Rachel Elwell told Pensions Expert, adding this is specifically around their approaches to climate change and net zero.
“I do think that is a tool that asset owners and managers are increasingly using to try to hold people to account within boards of the businesses that we invest in,” she said.
When we are appointing external managers, their track record and engagement, and their alignment with our policy is absolutely one of the things that we test
Rachel Elwell, Border to Coast Pensions Partnership
Emerging markets need support
Three-fifths of the £38.3bn in assets managed by Border to Coast are now covered by emission-reduction targets.
The pool’s equity allocation is entirely covered by the report, while just under two-fifths of its fixed income assets are covered by net zero targets. Other assets, including private market assets, sovereign bonds and multi-asset credit, do not have these goals.
Border to Coast has set targets for “Scope 1 and 2 emissions” for its listed equities and some of its fixed income assets. Scope 1 targets cover direct emissions, while Scope 2 and indirect emissions from the generation of purchased energy.
It is aiming for a 53 per cent cut to financed emissions by 2025 and a 66 per cent reduction by 2030. The pool is seeking to hit net zero by 2050 or sooner.
The race to net zero, however, is just part of an overall push towards improving the ESG credentials of institutional investors.
Exposure to sovereign debt, for example, can pose ethical problems in addition to the challenges investors face in measuring emissions. In August, the manager of the Railways Pension Scheme stood by the scheme’s decision to invest in Chinese government bondsin 2021, despite allegations of human rights abuses committed by the country’s government.
Elwell confirmed that the Border to Coast pool has exposures within its multi-asset credit fund to China and Russia.
“We need to be clear that ethical considerations are not necessarily the same as responsible investment, particularly around climate change,” she said.
The pool is working with other asset owners on transitioning emerging markets towards achieving net zero goals, in a collaboration that covers £400bn of investments.
Border to Coast does divest from or reduce holdings in assets “if the investment case has been fundamentally weakened” after unsuccessful attempts at engagement and work with other shareholders to drive reforms, its report said.
“When we are appointing external managers, their track record and engagement, and their alignment with our policy is absolutely one of the things that we test,” Elwell said.
However, a small but emerging opposition to net zero — largely led by commentators and some politicians — have called into question the need for investors to prioritise net zero targets.
“It is quite a complex area, and it’s one where people get very emotional. Mixing emotion and complexity isn’t always smooth,” she continued.
Elwell was raised in Pontefract, whose Ponty Prince mine closed in 2002. According to the Guardian, the mine was Pontefract’s biggest employer for at least three generations during its 142-year history.
She argued that it is important to be aware of the social consequences of moving away from fossil fuels, “while always recognising that it’s really important that we do transition to a low-carbon economy”.
“But doing that in a way that enables society to make that adjustment is really important if we’re going to be successful in the longer term,” she added.
‘Some asset managers are better than others’
Asset managers face increasing scrutiny over their ability to provide supporting evidence for their net zero pledges. This is the first time Border to Coast has formally set out its net zero targets, which means it is not possible to compare its asset coverage level as of March 31 2022 with previous years.
The Task Force on Climate-related Financial Disclosures came into force in April 2022, when it was made compulsory for some of the largest UK-registered companies and financial institutions to disclose climate-related financial information.
Recent analysis from XPS Pensions Group of 63 managers, covering 255 funds, revealed that the proportion of these companies that have made net zero pledges almost doubled in 2021, soaring to 81 per cent from 41 per cent in 2020.
However, only one in five of the managers were able to set out a “credible plan” for meeting their net zero goals.
“There has been an onus placed on asset owners, asset managers to start reporting, when there aren’t the same requirements on the businesses to provide the data we need to do the reporting,” Elwell said.
“This isn’t about saying asset managers are bad — some of them are better than others — but you can only report the data that’s available,” she added, leaving asset owners forced to make assumptions where the data is unavailable.
Sovereign debt carbon emissions cannot currently be measured
The pool’s equity allocation, valued at £19.9bn, is wholly covered by net zero targets. Of its fixed income assets, £3.3bn is covered, while £5.3bn of the pool’s fixed income allocation forms part of the 40 per cent of assets that are not covered by its report.
Border to Coast also included £9.3bn in private market assets that as yet are not covered by the net zero report. Of this allocation, £1.7bn is invested in private market assets.
Meanwhile, £3.6bn of the pool’s private markets allocation has been deployed but not invested. The remaining £4.5bn has been committed but not deployed.
Border to Coast estimates that around £600mn of capital has been committed to investments in climate solutions, of which approximately £175mn has been invested.
The pool has not set targets for “Scope 3 emissions” for these assets. These are indirect emissions that occur in a reporting company’s “value chain”.
Border to Coast’s report said that the lack of net zero or Scope 3 targets for 40 per cent of its assets was due to “the absence of sufficiently robust methodologies and issues with data quality and availability”.
“There isn’t yet an established approach for how you work out what the carbon footprint is for sovereign debt,” Elwell said.
The Church of England is among sponsors of a framework in development for measuring sovereign debt carbon emissions, which Elwell hoped would be live “in the next 12 months or so”.
TPR updates climate risks guidance
The Pensions Regulator has updated its guidance on climate-related risk requirements to include mention of the “portfolio alignment metric”, which affected schemes have had to provide since October 1.
In August, Hymans Robertson said that private market managers “seem generally unprepared to support clients” with the data they need to meet their TCFD requirements.
The company measured the level of data that managers contracted by its clients were able to offer on their funds across private debt, private equity, real estate and infrastructure, approaching 59 managers and 137 funds.
Nearly half of the managers (44 per cent) did not respond to Hymans Robertson’s enquiry. Forty-two per cent responded on all funds, while 14 per cent only provided information on some funds.
