On the go: Master trust Nest is to double its allocation to emerging market equities across its retirement date funds, while adding a climate-aware tilt to the strategy.
The switch to a strategy explicitly managing environmental, social and governance risks brings the proportion of the government-seeded provider’s portfolio under the ‘climate-aware’ designation past 50 per cent, with further expansions planned in the future.
Nest already invests 3.6 per cent, or around $480m (£360m), of its assets in emerging market equities with Northern Trust Asset Management, which will now manage a target 6 per cent green allocation within one segregated mandate.
The new strategy will track a custom index of stocks, tilting based on a combination of scores on energy efficiency, alternative energy, and green building.
New contributions coming into the cash flow-positive scheme are likely to be used to fund the new mandate rather than redemptions, with the overall stake in developed market equities and property trimmed to make way. Nest currently concentrates its emerging market equity allocations in the growth phase of members’ journeys.
The scheme is understood to have been cautious on the prospects for emerging markets earlier this year, given the damage wrought by the coronavirus pandemic. But the advent of a vaccine has bolstered confidence, alongside a long-term shift identified by head of responsible investment Diandra Soobiah.
“Over the next 10-20 years, countries like China and India are expected to see huge increases in urbanisation. Many emerging economies are also thinking hard about how to harness green technology to fuel their growth and leapfrog the dirtier industrialisation trends of the past. This presents opportunities for investors,” she said.
Sustainable business practices, and importantly transparency over the risks posed by corporate activities, has tended to lag developed markets in emerging economies. Ms Soobiah acknowledged the need for Nest’s new exposure not to come at the expense of its wider stance on issues such as climate change.
“It’s crucial that investors in such a strategy are active stewards for companies in emerging markets. We’ll encourage companies to prepare for the low-carbon transition to ensure they remain attractive investments for our members,” she said.
As well as the tilts built into Northern Trust’s index, portfolio-level exclusions such as a ban on thermal coal and tobacco will apply to the new investments. Nest acknowledged that it has more work to do on aligning its portfolio with net-zero emissions pledges and the limit to global warming envisaged by the Paris agreement.
The scheme took a major step in achieving this goal in July, moving almost half of its overall equity allocations into climate-aware strategies, and asking its manager to present it with ideas that will help it halve its emissions by 2030, going net-zero by 2050.
