By Ed McCarthy
Pension plan investment managers have broadly adopted environmental, social and governance (ESG) investing themes for their portfolios. Recently, though, more plans have begun implementing their environmental concerns by divesting from fossil fuels and transitioning to a low-carbon economy footprint through increased commitments to net-zero emissions.
For example, in October 2020 BT Pension Scheme (BTPS), the United Kingdom’s largest pension plan, set a 2035 net-zero goal for its entire £55bn portfolio. According to a company press release, over the next 15 years the majority of the plan’s assets will be reinvested, resulting in “a unique opportunity to invest in companies that have lower emissions and increase investment in transition solutions.”
All investment mandates eventually will be aligned with the net zero goal. BTPS will select and retain managers that it believes can achieve these guidelines and will require managers to report against a net zero climate scorecard.
The $226 billion New York State Common Retirement Fund followed suit with a December 2020 announcement that the fund had adopted a goal to transition its portfolio to net-zero greenhouse gas emissions by 2040. Per the fund’s press release: “This process will include completion within four years of a review of investments in energy sector companies, using minimum standards to assess transition readiness and climate-related investment risk, with, where consistent with fiduciary duty, divestment of companies that fail to meet minimum standards.”
Incorporating a Low-Carbon Strategy
During the November 4 CAiP Portfolio Construction & Optimization virtual conference, several investment professionals with Desjardins Global Asset Management discussed how pension plans can include low-carbon strategies effectively in their portfolios. Desjardins, which has over 30 years’ experience with environmentally conscious-investing, manages nine low-carbon exchange-traded funds.
Christian Felx, Gwendolyn De Guzman, Pierre-Luc Vachon
Christian Felx, Manager, Research and Responsible Investment with Desjardins Group Asset Management, explained that a portfolio’s underlying investment strategy typically determines the appropriate investment universe for consideration. However, if the plan wants to adopt or include a narrower strategy, such as a low-carbon strategy, it probably will need to consider and approve investments apart from the broad indexes. “It may be appropriate to include names from the clean tech sector or the renewable sector, even if they are not a part of the index in the first place,” Felx explained.
Plans can invest for specific objectives such as carbon emission reduction but doing so successfully requires “very specialized data where data quality is crucial,” said Pierre-Luc Vachon, Responsible Investment Analyst with Desjardins Group Asset Management. “Fortunately, data quality has been improving steadily for the last few years,” he notes. “An advantage of having a systematic approach to using this data is that you can replicate part of active management in a rule-based manner, which allows removing emotions that can be detrimental to the investment process.”
Gaining Momentum
The net-zero emissions movement shows no signs of slowing. As of year-end 2020, 33 international institutional investors representing $5.1 trillion in assets under management had joined the UN-convened Net-Zero Asset Owner Alliance. The group’s goal: Transition their investment portfolios to net-zero emissions by 2050. If your Canadian pension-plan clients are not considering these strategies already, it could be a good time to introduce them.
You can learn more about ESG strategies and the transition to low-carbon economy investment opportunities at the CAiP ESG & Sustainable Investments virtual conference on February 25.
