HSBC Pension Scheme – Interview


framework portfolio by portfolio to identify which companies are high emit- ters and then understand what the asset managers


are doing with those


companies. Taking a step back. The HSBC scheme is an outsourced model with asset manage- ment being provided by third party asset managers. We do not manage in-house; it is all managed externally. So, we built this management information framework to identify highly emitting companies based on emissions data, which is by definition backward looking. But we try to be for- ward looking as well to understand the extent to which these companies are aligned with the Paris Agreement and then have our asset managers monitor the progress that those companies have made on the journey towards net zero. We do not engage with the companies themselves; we allow the asset manager to do that. But that means we need good management information that tells us which companies are of interest, what their decarbonisation path is and are they aligned to a net-zero target? If not, that would be a red flag, so we would have to speak to the asset manager to engage with them. We would then use that lever of engagement with asset managers to push change throughout the value chain, not just with the companies themselves. That sounds easy to do but is actually fraught with complexity. Incomplete information is one reason there is only


HSBC’s focus is on reducing real economic emissions.


partial coverage of emis- sions data from underlying corporates. When you look at that data to see who is ac- tually aligned with the goals of the Paris Agreement, there are no widely accepted metrics in the industry so that is challenging to do.


BRIAN KILPATRICK’S CV


2020: Chief investment officer HSBC Bank Pension Trust (UK)


2018: Trustee director The Law Debenture Pension Trust Corporation


2017: Director of pensions Santander UK


Setting a 2050 carbon reduction target has become an increasingly popular strategy. Isn’t this just a case of kicking the can down the road? We set interim targets for our listed equity and corporate assets to be fully aligned with the goals of the Paris Agreement. Obviously, that boils down to engagement with underlying companies, but we recognise that we need to imple- ment these goals now. April’s Intergov- ernmental Panel on Climate Change re- port suggested that we need to get greenhouse gas emissions to peak in the next few years. So, we are actively engag- ing with asset managers on that. One of our advisers – Lane Clark & Pea- cock – have stopped recommending man- agers if they have not signed up to the Net Zero Asset Managers Initiative. So, there is pressure on asset managers from asset owners, regulators and investment con- sultants. The impression I get when speaking to asset managers is that change is happening. We have been publishing them since 2018 and year on year the data coverage is getting better and we generally see the weighted average carbon intensity of emissions is dropping. Whether it is dropping in line with 2050 targets is a more complicated question, but progress appears to be happening, although it is early days and trends are complicated by the data issues I referred to earlier.


What does this mean for your fixed income strategy, given that the DB fund is bond heavy?


2015: Director of portfolio strategy Santander Asset Management


2014: Head of pensions Marks and Spencer Pension Scheme


2006: Head of pension trust investments Marks and Spencer Pension Scheme


The short answer to that question is: all of the above, except we don’t have a vote at AGMs. The process of identifying highly-emit- ting companies and their alignment with the Paris Agreement is still there. And we encourage our bond fund managers to work with those companies to bring car- bon emissions down. Companies need capital, in the form of debt and equity, and the managers I speak to assure me they are getting access to senior executives to drive home this point about net zero. We are now getting examples of bond fund managers selling holdings that are not aligned with the Paris Agreement. I do not want to overstate that, it is just an example, but it is not something I have seen before. That says to me, this is hit- ting home, this is real, asset managers are listening. Fundamentally, it is not a debt or equity argument,


but a company argument.


They need to exhibit certain behaviours in order to attract capital to sustain their business model and, as long-term inves- tors, we want to see and invest in sustain- able business models.


You sound quite hopeful there. I would like to think I am a hopeful per- son, but we all need to recognise the scale of the challenges.


Issue 113 | May 2022 | portfolio institutional | 15


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