Investing in our sustainable future
We believe that climate change, in particular, represents a systemic risk to people, the planet, and to the investment returns which are necessary to enable payment of pensions. The need for action on the climate crisis is more critical now than ever before.
Our fund, already recognised as a leader in Responsible Investment, has recently reviewed its investment strategy to support the transformation of our portfolio for a lower carbon world.
The changes we have made and are continuing to make will enable us to lower our carbon footprint and invest more capital in renewables, while preserving our ability to guarantee pension payments to beneficiaries.
As a long-term investor we aim to contribute to a sustainable future and look forward to sharing progress made toward our ambitious climate change objectives, in-line with international government agreements.
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Climate Change FAQ
Avon Pension Fund, already recognised as a leader in Responsible Investment, has recently reviewed its investment strategy to support the transition to a greatly reduced carbon economy. We have set clear climate change objectives to reduce the amount of carbon our investments generate, to invest more heavily in companies and assets that are making a contribution to the low carbon transition and to use our influence as a shareholder to ensure those individuals and communities affected by the transition are protected.
The below FAQs set the context for the Fund’s decision to lower our carbon exposure and invest more capital in renewables, while preserving our ability to guarantee pension payments to beneficiaries. We believe that, in the medium and long-term we will deliver sustainable investment returns by investing in companies and assets that effectively manage the risks and opportunities presented by climate change.
Climate change can refer to any substantial variation in the earth’s climate over a long time period, though it is most commonly used to refer specifically to the observed increase in global temperatures over the past century.
Climate change is a strategic priority for the Fund. The Fund addresses climate change principally through the investments it makes; it can choose to invest in companies/solutions that directly address climate change, minimise its exposure to companies/investments that are not aligned with the Fund’s climate change position and can also use its influence as a shareholder to effect change in companies that are falling short of expectations.
The Paris Agreement is an international agreement signed by 196 countries in 2016, pledging to reduce global emissions so as to combat climate change.
The Paris Agreement’s long-term goal is to keep the increase in global average temperature to ‘well below’ 2°C above pre-industrial levels, and to pursue efforts to limit the increase to 1.5°C.
The Paris Agreement forms the basis for the Fund’s climate change objectives. In addition to our short- and medium-term aims to further reduce the carbon intensity of the investments portfolio and to allocate more money to renewable energy, the Fund also has the ambition to implement a <2°C aligned portfolio by committing to net zero emissions by 2050 or earlier.
The scientific consensus is that current changes to the climate are largely driven by human activity. The Intergovernmental Panel on Climate Change (IPCC) concluded in 2014 that human activity is ‘extremely likely’ to be the dominant cause of climate change. Specifically, the extraction and burning of fossil fuels which releases greenhouse gases including carbon dioxide and methane. These gases reduce heat loss from the earth’s atmosphere, thereby contributing to warming.
Climate change impacts on the profitability of companies - and thus on the value of an investment fund – in two ways:
- Physical risk: Damage to business operations from extreme weather such as floods or droughts.
- Transition risk: Damage to business profitability as a result of the transition to a low-carbon economy. Transition risks include changes in legislation and changes in consumer preferences linked to climate change.
The low-carbon transition brings with it opportunities to generate superior financial returns by supporting companies best placed to succeed in a world less reliant on fossil fuels. Investors can minimise climate risks and maximise opportunities from the low-carbon transition.
Specifically the Fund seeks to manage climate risk through:-
- Engagement: The process of continued dialogue with a company and other relevant parties with the aim of influencing their behaviour in relation to environmental, social or corporate governance (ESG) practices.
- Decarbonisation: Reducing investment in high-carbon businesses and sectors.
- Seeking positive impact - investing in sustainable companies and investment opportunities that directly address the risks attached to climate change.
A carbon footprint refers to the quantity of greenhouse gas emissions that result from the activities of an individual, group of people, or a company. Investors, including the Fund, measure the carbon footprint of their investment assets using a method called Weighted Average Carbon Intensity which measures a portfolio’s exposure to potential climate change-related risks relative to other portfolios or a benchmark. Our carbon foot printing includes so-called scope 1, scope 2 and first tier scope 3 emissions.
The Fund measures the carbon footprint of its equity investments every year. This analysis is vital and informs the Fund on how it is progressing against its climate change objectives. It also helps to highlight where the Fund should be focussing its engagement efforts. The Fund has made significant progress since it started investing in dedicated low carbon strategies in 2017. The most recent analysis indicates that the Fund is 25% [1] less carbon intensive than the wider market; a 12% year-on-year improvement indicative of the fact the Fund’s investment managers invest in less carbon intensive sectors and companies than the wider market.
[1] On a Weighted Average Carbon Intensity basis at 31 December 2019
Renewable energy refers to energy generated from infinite sources such as the sun, wind, tides or waves. Once they are in operation, renewable energy assets produce very low emissions. Of course, the construction of these assets (such as a wind turbine) produces significant emissions, but in the long-term, renewable energy is vastly less harmful than fossil fuel-based energy in terms of emissions generated over the life cycle of the asset.
The Fund allocates capital to renewable infrastructure opportunities that span well-established forms of alternative energy such as wind and solar and emerging technologies such as bioenergy, renewable energy storage and low carbon farming techniques. The Fund has £245m committed to such projects which is being invested over the next few of years.
Just transition refers to the challenge of ensuring that actions to reduce climate change do not have an excessively negative impact on particular communities, for example those employed by mining companies in developing countries.
The Fund wholeheartedly supports a just transition as it moves towards its aim of investing at least 30% of its assets in sustainable and low carbon investments by 2025. It is important for us as investors to ensure the safety, wellbeing and sustainability of communities that are heavily dependent on these industries for their livelihoods.
Divestment is the act of selling the shares of a company in response to concerns over environmental, social or corporate governance issues. However, such action can have limited impact. Firstly, once you are not invested, an investor has less ability to influence the company to adopt strategies that address the concern. Secondly, divesting only targets specific companies/sectors; the impact of carbon emissions is an issue across all sectors and companies which needs to be addressed if investors are going to have an impact. Finally, divesting forces the share price of fossil fuel companies down, which presents an opportunity for other investors less concerned with climate change to buy those shares cheaply. Ultimately, this reduces pressure on companies to improve their climate performance.
Instead, we use our influence as part of the £30bn Brunel Pension Partnership to encourage change in the wider industry. Engaging collaboratively as a pool amplifies our voice in persuading companies and fund managers to adapt their business models to align with the Paris Agreement. If engagement does not work within the timeframe set out in the Paris Agreement, we will consider selective divestment from laggard companies.
We actively participate in projects with the Institutional Investors Group on Climate Change (IIGCC) and Climate Action 100+ (CA100+) engagement programme, working with other investors to develop a global framework on responsible climate change lobbying, and working with the IIGCC to develop a climate change adaptation risk assessment and management framework.
The Fund’s managers are expected to deliver in line with our policy. This could mean being able to articulate and evidence how climate change risk is considered at firm level and how ESG factors are integrated into the investment selection process.
It is critical that we consistently and rigorously challenge our investment managers on all aspects of their investment processes and expect them to explain and justify the investment decisions that they are making.
Brunel Pension Partnership (Brunel) is one of eight national Local Government Pension Scheme (LGPS) Pools, bringing together circa £30 billion investments of 10 likeminded funds. Long-term sustainable investing in the interests of the Fund’s that it represents is of central importance to Brunel.
Brunel manages climate change-related risks and opportunities through fund selection and monitoring, and through the engagement it undertakes with investment managers on behalf of the Fund’s it represents.
APF is a shareholder in the Brunel company. As such it has a key role in the governance and oversight of Brunel. Ultimately, the APF Committee sets strategic investment objectives, which Brunel are then tasked with implementing. The Fund provides significant input into the policies that Brunel develop to ensure its views are properly reflected.
Brunel has an important role to play in supporting and enabling action on climate change and has made climate change a strategic priority. Brunel focusses its efforts in the following five areas where it can make a significant difference:
- Policy Advocacy – Brunel encourages policy makers to establish comprehensive and robust climate change policy frameworks
- Product Governance – Brunel encourages innovation in investment products that have a positive impact on the climate
- Portfolio Management – Brunel works with its managers to ensure the resilience of its portfolios to climate change
- Positive Impact – Brunel is transparent in reporting on its contributions to climate change, allowing others to learn from its experience
- Persuasion – Brunel challenges and encourage companies and other entities in which we invest and contract with to support the transition to the low carbon economy.
Specifically, Brunel helps the Fund achieve its climate change objectives through: -
- Actively reducing carbon intensity of its investment portfolios against defined targets and milestones
- Participating in industry leading initiatives such as United Nations Principles of Responsible Investment (UNPRI), IIGCC and others to ensure the Fund has access to best-in-class analytics and research used to make investment decisions
- Funding research and helping to establish a benchmark for Paris aligned investments
Weighted Average Carbon Intensity (WACI) – shows a portfolios carbon intensity by linking emissions of companies held within a portfolio to revenues and then weighting the resulting carbon intensity score based on its holding size within a portfolio. The Fund calculates its WACI for listed equity assets on an annual basis and will continue to use this metric alongside others to assess decarbonisation progress. WACI is one of the measures recommended by the Task Force on Climate-related Financial Disclosures (TCFD) and is useful because it:
- Can be applied across different asset classes
- Uses a well-established and systematic way of calculating carbon intensity
- Can be used to identify individual assets with high emissions scores within a portfolio
Absolute Emissions – We analyse the absolute emissions of the companies that we invest in, in metric tonnes of carbon dioxide equivalents. This data represents a company’s reported or estimated greenhouse gas emissions, where available. Company emissions are attributed to the Fund based on the value of our investments in them. The focus on absolute emissions for decarbonisation target setting enables a focus on real world emissions reductions, needed for the world to reach net zero and mitigate global warming. Our 2025 and 2030 interim decarbonisation targets are based on this measure.
Future Emissions from Reserves – We analyse company revenue exposures and potential emissions from disclosed proven and probable fossil fuel reserves to determine our level of exposure to ‘stranded assets’. Stranded assets are assets that may suffer premature write-downs and may even become obsolete due to changes in policy or consumer behaviour. Like WACI, we measure future emissions from reserves on an annual basis.
Disclosure Rates – We also track the rate at which companies report their own carbon data (e.g. in financial reports). Increasing transparency in company disclosures is a core aim of the engagement work adopted by the Fund, Brunel and its strategic partners.