The Environment Agency Pension Fund has reduced its carbon footprint by 44 per cent since 2008, as it looks to avoid the long-term financial risk of climate change.
Schemes are increasingly looking to integrate environmental, social and governance factors into their investment portfolios to protect against the risks posed by irresponsible or short-sighted business practices.
More recently the long-term financial risks of holding fossil fuel stocks has also come to the fore among pension fund investors.
Speaking at an event last week, Dawn Turner, head of pension fund management at the EAPF, introduced carbon footprinting as part of the second phase of the ESG integration plan it began in 2003.
The Environment Agency Pension Fund’s ESG integration plan
Phase 1 2003-2007: Initial steps including introducing ESG to manager selection, introducing a sustainable equity mandate and private equity investment in clean technology
Phase 2 2007-2010: Expanded commitment including environmental and carbon footprinting, additional equity managers and a target for 25 per cent of portfolio in clean and sustainable equities by 2015
Phase 3 2011-2013: Strategic considerations including changing the view of risks and fund maturity and introducing a real assets mandate for property, infrastructure, forestry and agriculture
Phase 4 2013-2015: Detailed integration including measuring fossil fuel exposure and strengthening engagement
Phase 5 2015+: Goals to further decarbonise portfolio and engage with companies
Turner said: “[Footprinting] is obviously not about footprinting, it’s about what you actually do with that analysis and the actions you take from it. And the actions we have taken have meant that since 2008 we’ve seen a 44 per cent reduction in our carbon footprint across the portfolio.
Depending on how businesses react to these changes they will win or they will lose
Bruno Gardner, The Carbon Trust
“We have invested just over 26 per cent in clean and sustainable equities by 2015, and we’ve continued to have returns above benchmark.”
She added that using ESG was as much about managing downside risk as about generating return, but the fund still outperformed its benchmark by 1.4 per cent last quarter, equal to roughly £30m.
Real assets are hard to find
Investing using ESG has become easier in recent years as the concepts behind it become more mainstream, Turner explained. Following the introduction of its real assets mandate in the third phase of its plan, the scheme struggled to find suitable investments.
“It’s about getting the right things at the right time,” Turner said. “It’s been quite a slow burn but now it’s moving quite fast, and that’s because we feel that over the last two years it’s moved from finding good niche opportunities to it becoming much more mainstream. That’s because the demand there is growing.”
Bruno Gardner, managing director of low-carbon property development partnership Low Carbon Workplace at the Carbon Trust, said climate change would create massive change for businesses, but those well-placed to adapt could profit.
EAPF's world-beating footprint reduction strategy…
Source: EAPF
He said: “Depending on how businesses react to these changes they will win or they will lose… it will be businesses that are proactive, who are on the front foot, who take bold, strategic action because they recognise this inexorable direction of travel, who stand to gain from addressing climate change and adapting.”
However, while investment managers are increasingly taking ESG factors into account when assessing potential investments, Cathrine de Coninck-Lopez, sustainable and responsible investment officer at asset manager Columbia Threadneedle Investments, said it would not necessarily prohibit them from making investments.
“We consider the risks and opportunities... so if you have a company where emissions are increasing hugely and the company is potentially not doing that well, maybe you would think twice. But we could invest at the same time,” adding that where it did choose to invest, the manager would look to engage with the company.
