ESG industry view – Brunel Pension Partnership


David Cox is deputy chief investment officer at Brunel Pension Partnership


MAKING PARIS GOALS HAPPEN


Asset owners and asset managers play a crucial role in helping reorient the global economy towards a low-carbon future. But whether we succeed in the fight against global warming will not be known for decades. How can we translate a high- level policy, such as the Paris Agreement goal of achieving net-zero greenhouse gas emissions by 2050, into the measurable investment objectives that asset manag- ers require? For Brunel Pension Partner- ship, one of the UK’s eight national local government pension scheme pools, there is no single answer – but there is the odd game-changer.


Brunel brings together the £40bn invest- ments of 10 like-minded pension funds. In November, during the COP26 Glasgow summit, Brunel announced it was transi- tioning more than £3bn to index funds run by Legal & General Investment Man- agement, tracking new FTSE Russell Par- is-aligned benchmarks (FTSE EU Climate Benchmarks Index Series | FTSE Russell) that it had helped to develop. FTSE Rus- sell’s Paris-aligned benchmark series meets the requirements of the EU’s Paris- aligned climate benchmarks by achieving a 50% reduction in carbon emissions over a 10-year period. It also goes a step further by integrating forward-looking metrics and governance protections from the Transition Pathway Initiative (TPI). TPI provides assessments of how the world’s largest and most carbon-exposed compa- nies are managing the climate transition. Exposure to any given index constituent


within the FTSE Russell Paris-aligned benchmark series rises or falls according to several exposure objectives, covering fossil fuel reserves, carbon reserves and green revenues, as well as forward-look- ing alignment with Paris goals. Integrating a responsible investment pol- icy into the pension scheme’s strategy and objectives is a process of continuous improvement. We’re fortunate that we’re in a position where our clients—the 10 local government schemes within Brunel—have a long-term outlook. How- ever, as we work through the outcomes we’re looking for, it’s about understand- ing the risks we’re taking, but also the opportunity set and how the net-zero tran- sition will affect it. We’ve always engaged actively with the companies we hold within our portfolios - we don’t impose blanket bans on the energy or automotive, and nor should we. We need to be active shareholders to achieve the net-zero tran- sition. Otherwise, we may not get there. A naïve approach to building a responsi- ble investment portfolio could lead asset owners astray. Banks operate from offices and can buy their energy from renewable sources, so they look very green. But a bank may be a large financier of fossil fuels and it may promote carbon-inten- sive activity. So, we always need to return to our assumptions and to test them. We collaborate actively with the experts at FTSE Russell who run the data behind the indices, as well as with external academic experts. This helps us continuously refine our investment processes. To give another example, applying the same decarbonisation constraints to a portfolio of developed and emerging mar- ket equities might result in perverse out- comes. That is because, for historical rea- sons, different countries and different industries are likely be at different points in the net-zero transition. Asset owners must manage the resulting diversity. We have to transition in a just way. We cannot just say ‘let’s just turn off anything bad and see what happens’. In a country like


the UK with relatively low gas and coal usage, that approach might work. But if you go to Vietnam, they would not have electricity if we took that approach. You cannot approach emerging markets from a Western or developed market viewpoint. This realisation does not mean Brunel relaxes the climate risk goals it sets its benchmark designers and asset manag- ers. The pension plan has a stated goal of decarbonising its global listed equity port- folio by at least 7% a year. Having the right mindset and a commitment to open- ness are


just as important as setting numerical goals.


The transparency of our strategy and underlying positions is incredibly impor- tant. We need to be clear about the out- comes we are looking to provide and how we are looking to provide them. And we integrate responsible investment across everything we do. To assist in our self- monitoring process, Brunel publishes an annual Responsible Investment and Stewardship Outcomes report, in which it goes into detail about our performance against its stated goals.


Our approach is built on three pillars. These are to integrate sustainability crite- ria into our operations and investment activities, to collaborate with others across the industry and support effective policy- making, and to be transparent in our activities. These three pillars underpin our operations, providing a bedrock for our team, our clients and our managers. In manufacturing and technology, contin- uous improvement—a focus on increas- ing the effectiveness of an organisation to fulfil its policy and objectives—is now a standard business approach. The Paris- aligned climate benchmarks underlying Brunel’s new £3bn portfolio are designed in a similar way. As new data on climate change becomes available and as the sci- entific evidence deepens and improves, the benchmarks’ in-built flexibility will allow them to be upgraded as well.


This blog was first published on the FTSE Russell website. Issue 111 | March 2022 | portfolio institutional | 27


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