Brunel Pension Partnership Limited (Brunel) is one of eight national pooled funds and manages the investment of the pension assets for the funds of Avon, Buckinghamshire, Cornwall, Devon, Dorset, Environment Agency, Gloucestershire, Oxfordshire, Somerset and Wiltshire. Brunel manages circa £30 billion investments on behalf of these 10 Local Government Pension Scheme funds.
We believe in making long-term sustainable investments supported by robust and transparent process. We are here to protect the interests of our clients and their members. In collaboration with all our stakeholders we are forging better futures by investing for a world worth living in.
Brunel’s clients retain responsibility for their own asset allocation and investment strategy, and for defining their exposure to a variety of investment risks, including those presented by climate change.
We offer our clients a range of portfolio options with the aim of allowing them the flexibility to meet their own investment strategy needs, whilst equipping us to manage risk and generate sustainable, long-term returns. We offer approximately 25 portfolios across five categories: passive equities and corporate bonds, active equities, fixed interest, private markets and liquid alternatives. These portfolios allow each client the flexibility to fine tune their asset allocation and to reflect market developments.
We manage climate change-related risks and opportunities through accounting for these in our fund selection and monitoring processes, and through our engagement with the investment managers that we appoint.
We believe we have an important role to play in supporting and enabling action on climate change. Our experience and expertise in managing climate change-related risks and opportunities together with our scale and the strength and support of our Clients provides us with a unique position in the investment industry. We have identified three areas where we see Brunel having a particular contribution to make:
Our specific actions are shaped by the duties that we owe to our clients to invest prudently and with care, and by our clients’ fiduciary duty to act in the best long-term interests of their members. In that context, we recognise that climate change may affect our portfolios, the sustainability and resilience of the financial system, and the sustainability and health of our economy, our society and the natural environment, over the short, medium and long-term. We also 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.
Scientific evidence suggests that our climate is changing faster than at almost any point in history. The world is already at approximately 1°C of warming above pre-industrial levels. This is causing more frequent and more extreme weather events and significantly affecting rainfall and sea levels, among other changes. It is impacting agriculture and food supply, infrastructure, flooding and water supply, in turn leading to increased migration from climate-affected regions and greater conflict over natural resources such as water and agricultural land. Research from the Intergovernmental Panel on Climate Change (IPCC) and other authoritative bodies, suggest that global temperature rises of 2°C or even 1.5°C above pre-industrial levels of warming are likely to have catastrophic impacts for society and the environment. Current trends and projections show us heading towards a world of 4°C of warming compared to pre-industrial levels.
Climate change is global in scope, and will have major impacts on all aspects of our human and natural systems. Investors are exposed to these impacts and to the risks and opportunities presented by government action on climate change, both in relation to adaptation and to mitigation.
Brunel’s climate change beliefs are that:
Given our strengths and our position in the market, we therefore believe that the key objective of our climate policy is to systematically change the investment industry so that it is fit for purpose for a world where temperature rise needs to be kept to well below 2°C compared to pre-industrial levels.
In our Climate Change Policy, we have identified five priority areas for action
Policy: We will encourage policy makers to establish comprehensive and robust climate change policy frameworks that deliver significant reductions in greenhouse gas emissions, accelerate progress towards the low carbon economy, and enable effective adaptation to the unavoidable impacts of climate change.
Products: We will increase the number and range of products available to our Clients and the wider investment market that deliver substantial climate change benefits and sustainable investment returns.
Portfolios: We will ensure our investment portfolios are resilient under a range of climate change scenarios (both mitigation and adaptation) by adopting best practices on climate risk management and by working with our managers to further improve and develop our processes.
Positive Impact: We will enable investments in activities that directly support the low carbon transition and that enable effective adaptation to the unavoidable impacts of climate change.
Persuasion: We will encourage the companies and other entities in which we invest and contract with to support the transition to the low carbon economy, and to ensure that they are resilient to the unavoidable impacts of climate change.
The five priority areas, and associated actions, we have identified in our Climate Change Policy are intended to ensure that our investment portfolios are aligned with the goals of the Paris Agreement on Climate Change.
There is as yet limited consensus on what alignment with the goals of the Paris Agreement means for the investors. We are, therefore, funding and playing a major role in a collaborative project coordinated by the Institutional Investors Group on Climate Change.
The project, the Paris Aligned Investing Initiative, will define what Paris alignment means and how it can be measured for different asset classes. By 2022, we will have used the tools developed by this project to assess the degree to which our main listed equity portfolios, and possibly other portfolios, are, at least, 2°C aligned. If these portfolios are not aligned, we will identify the actions needed to bring them into alignment and engage with our Clients as to how this might be achieved.
We continue to implement best practices on climate risk management and to work with our managers to further improve and develop our processes.
We have done a significant amount within our direct sphere of influence to address climate change; for example we conduct carbon footprints of all our listed equity portfolios and allocate 35% of our infrastructure portfolio to renewable energy funds. But our ability to do more is constrained by the market.
We recognise that climate change is a dynamic issue from an investment perspective, and our understanding of the science, of the policy goals and of the financial implications is constantly changing. We need to ensure that we and our investment managers are aware of and are acting on these changes. This requires us to assertively, 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.
In addition, we will conduct our own stress tests of portfolios, using the best methodologies we have access to, from 2020 onwards, and we will continue to ensure that climate change considerations are integrated into all the mandates that we award.
We play an active role in many of the key investor initiatives on climate change. Our Chief Responsible Investment Officer is Co-Chair of the Transition Pathway Initiative. We actively participate in projects with the Institutional Investors Group on Climate Change and the United Nations Principles for Responsible Investment, amongst others. These include participation in the 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.
We want to enable investments in activities that directly support the low carbon transition and that enable effective adaptation to the unavoidable impacts of climate change. We have done a significant amount within our direct sphere of influence to address climate change; for example we conduct carbon footprints of all our listed equity portfolios and allocate 35% of our infrastructure portfolio to renewable energy funds. But our ability to do more is constrained by the market.
Our view is that the nature of the investment system, and of financial markets more generally, contributes to the challenge of addressing climate change rather than supporting change. Some of the specific challenges we see include an emphasis on short-term rather than long-term performance which drives short-term thinking by investors and companies, an unwillingness to invest in areas that support the transition to the low carbon economy, a general absence of investable investment products that make a substantive contribution to climate change mitigation or adaptation and backward looking investment risk models that are inherently flawed at taking account of climate risk. A central element of our climate change policy is to shape and influence the investment system so that it is fit for purpose for a world where temperature rise needs to be kept to well below 2°C compared to pre-industrial levels.
We want the companies and other entities in which we invest and contract with to support the transition to the low carbon economy, and to ensure that they are resilient to the unavoidable impacts of climate change.
We challenge companies to explain how aligned their businesses are with the goals of achieving a net-zero carbon future and of supporting efforts to keep global temperature increase to well below 2°C, and what actions they are taking to ensure this alignment. We also challenge them to explain how they are adapting their businesses to ensure they are resilient to the impacts of climate change.
For large greenhouse gas emitting companies, we use the Transition Pathway Initiative (TPI) to guide our engagement with these companies. We aim to have all of our material holdings to have achieved TPI Level 4 (the highest rating of their management quality) by 2022 and to have made meaningful progress towards aligning their business with a 2 degree or below pathway.
A key area of focus for Brunel is on driving real and substantial change in how investment managers invest. We will challenge them to provide investment products that deliver on both our investment and climate change objectives. We expect investment managers to engage effectively with companies and other entities on climate change.
While we will not instruct our investment managers to exclude certain stocks, we do expect them to have portfolios with materially reduced climate exposures and to be able to justify any climate controversial holding. If investment managers are not able to robustly and credibly explain their investment strategies and how they have integrated climate risk, we will look to replace them with investment managers that do.
Climate change considerations are integrated into all the mandates that we award.
The responsibilities for managing and overseeing our Climate Change Policy are distributed across Brunel:
We will report regularly to our clients on our progress against the commitments set out in the policy. We will also produce an annual public report on the overall exposure of our portfolios to the risks and opportunities presented by climate mitigation and adaptation, and on how we are managing these risks and opportunities. We will align this reporting with the TCFD recommendations and other relevant disclosure frameworks.
In late 2022 we will conduct a full stocktake of the Climate Change Policy that will provide us and our Clients with the opportunity to reflect on our progress and to ramp up our ambitions. We expect that the stocktake will assess:
Brunel’s Stewardship Policy contains our voting guidelines on key topics. These set out our expectations of companies and their Board and management.
We will update our Stewardship Policy in 2020 to enhance the alignment with our engagement on climate change. We will extend our current policy which allows us to vote against the reappointment of the Chair in companies that have not met our climate disclosure expectations to one where we can also vote against other board members. Our expectations will increase over time in line with our aspiration of all our material holdings being on TPI Level 4 by 2022 and having made meaningful progress to alignment with a 2 degree or below pathway.
Voting records are published quarterly on our website.
We want the companies and other entities in which we invest and contract with to support the transition to the low carbon economy, and to ensure that they are resilient to the unavoidable impacts of climate change. As a large investor, we – on behalf of our Clients – encourage companies and other entities to take action on climate change, both to mitigate and adapt for climate resilience. The Persuasion segment of the five-point plan in our Climate Change Policy details how we will engage with companies and other entities, across asset classes.
In addition, through our Responsible Investment Policy Brunel identifies priority themes where the potential financial impact cuts across countries, sectors, portfolios and asset classes. Details on our overall approach to engagement is detailed in our Stewardship Policy and our engagement records are published here. We will also produce an annual public report on the overall exposure of our portfolios to the risks and opportunities presented by climate mitigation and adaptation, and on how we are managing these risks and opportunities. We will align this reporting with the TCFD recommendations and other relevant disclosure frameworks.
Climate Action 100+ is an investor initiative launched in 2017 to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. More than 370 investors with over $35 trillion in assets collectively under management are engaging companies to:
The investors that have signed on to Climate Action 100+ are requesting the boards and senior management of companies to:
Provide enhanced corporate disclosure in line with the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and, when applicable, sector-specific Global Investor Coalition on Climate Change Investor Expectations on Climate Change. This will enable investors to assess the robustness of companies’ business plans against a range of climate scenarios, including well below 2 degrees Celsius, and improve investment decision-making.
For a fuller explanation of our policy in this area, please see ‘Our approach to engagement and divestment‘
We do not issue exclusion lists because we believe that simply imposing exclusions or requiring divestment from specific stocks or sectors will not compel investment managers to develop their capacity on climate change or to drive change in the companies in which they are invested. That is, with divestment lists, climate change becomes a technical operational matter not an investment priority.
Our approach does, however, require investment managers to explain and justify their investment decisions, in particular in situations where an investment has significant associated greenhouse gas emissions, and in situations where better (from a climate change perspective) opportunities are available.
Our view is that, through integrating climate change into our risk management process, through assessing and challenging our investment managers on their investment processes and on what they invest in, we can reduce unrewarded climate and carbon risk, and increase our exposure to climate-related opportunities. This is likely to result in selective divestment based on investment risk, supporting our commitment to decarbonise our listed portfolios.
Our divestment strategy may change after the 2022 stocktake – once we have a comprehensive assessment of how we have performed against our objectives and targets.
We assess the merits of climate change-related shareholder resolutions on a case-by-case basis. We will generally support such resolutions in cases where the objectives of the resolution are in line with the goals of the Paris Agreement and where we consider that the proposals being made will contribute to the realisation of these goals. In line with our Stewardship Policy, we will also vote against the Chair and/or other board members in companies whose disclosure or performance does not meet our expectations, and where the company has not responded constructively to engagement on these matters.
On climate mitigation we believe we should not only focus our efforts on how companies with the biggest impact on climate change – these include companies in sectors such as oil and gas, transport, mining and electricity – are adapting their business models for the low carbon economy but also those companies who provide other sources of capital to these entities.
We see influencing policies within the banking sector as being particularly important in changing behaviour. For example, lending policies to companies (not supporting new fossil fuel extraction) and wider society (provision of green mortgages and loans to support other innovations).
The proposal at Barclays, requests that the bank publishes a plan to gradually phase out the provision of financial services to energy companies and to utilities that are not aligned with the goals of the Paris climate agreement. Barclays is the largest financier of fossil fuels in Europe and the sixth largest globally, providing US $85 billion of finance to fossil fuel companies since 2015.
We prioritise engagement with those companies or other entities with the biggest climate change-related impacts or risks, where we have a significant exposure and where we have the ability to effect change. We have played a leading role in growing the Transition Pathway Initiative which assesses how some 400 high impact companies are managing their greenhouse emissions, and how their expected future carbon performance compares to international targets and national pledges made as part of the Paris Agreement.
On climate mitigation we believe we should not only focus our efforts on how companies with the biggest impact on climate change – these include companies in sectors such as oil and gas, transport, mining and electricity – are adapting their business models for the low carbon economy but also those companies who provide other sources of capital to these entities. We see influencing policies within the banking sector as being particularly important, in particular that they have lending and financing policies that explicitly restrict or prohibit their support for new fossil fuel extraction and that they have policies that support climate change mitigation and effective adaptation at scale.
We are conscious of engagement impact in different asset classes, of the varying levels of influence we – individually and in partnership with others – might have, and how we might best utilise that influence. Engagement impact in private markets can be strong, we will work with our general partners to support private companies, real estate, infrastructure projects and other entities in managing their impacts on climate change and the impacts of climate change on them.
Our approach to engagement is discussed in other questions here and further in the Climate Change Policy and the Stewardship Policy. Our overall ambition is for these companies have achieved Level 4 (the highest rating of their management quality) in the Transition Pathway Initiative by 2022 and to have made meaningful progress towards aligning their business with a 2 degree or below pathway by this time. The oil and gas sector is a key focus for the CA100+ initiative.
We will use the Transition Pathway Initiative (TPI) to assess companies’ preparedness for the transition to the low-carbon economy. We will challenge our material holdings to advance at least one level (up to 4*) per year on the TPI management quality framework.
We will reinforce our efforts by requiring our investment managers to make robust assessments of companies’ progress on climate change and in meeting the Paris Agreement goals, and to proactively engage with those companies that are not delivering substantial progress in these areas.
We will assess how our portfolios and mandates align with the goals of the Paris Agreement.
We support and will play an active role towards establishing a meaningful price on carbon (and equivalents e.g. methane) across the global economy. It needs to be material (i.e. sufficient to drive change at the scale and rate required), progressive over time and widespread (i.e. applies to all major sectors of the economy). This, along with the removal of fossil fuel subsidies, are two key objectives in the Policy segment of our Climate Change Policy.