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 £35 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 22 portfolios across three categories: passive equities and bonds; active equities and bonds; and private markets. We also launched a local impact portfolio in 2022. 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 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. Brunel’s experience and expertise in managing climate change-related risks and opportunities; our scale; our influence; and the strength and support of our clients, provides us with a unique position in the investment industry. We see our role as helping our clients to understand and manage these risks, while also helping to address the climate challenge.
There are three ways in which we have 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.
Limiting the temperature increase to 1.5°C above pre-industrial levels is now more critical than ever. The world is already at approximately 1.1°C of warming above pre-industrial levels and current policies in place globally but the world on track for a central estimate of around 2.7°C1 warming by 2100, assuming all targets are met. This means that 4°C of warming could still be a reality if targets are not met in time.
Research from the Intergovernmental Panel on Climate Change (IPCC) and other authoritative bodies suggests 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 – more extreme weather events and significant meteorological changes, including to rainfall and sea levels. Future climate risk is much larger if global warming exceeds 1.5°C, before then returning to that level by 2100, than if global warming gradually stabilizes at 1.5°C.
The difference is particularly pronounced if the peak temperature is high (2°C). In such a case, a lot of the impacts will be long-lasting and irreversible, such as the loss of ecosystems.
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. As we get closer to 2050 and climate action is still not sufficient, physical and transition risk becomes more uncertain and potentially greater.
The financial services industry’s understanding of the nature of climate change has developed significantly over the last few years, with most participants regarding it as a foreseeable and materially significant financial risk. Investors are also part of the solution and have a critical role to play if we are to successfully transition to the low carbon economy and to ensure that we adapt effectively to the physical impacts of climate change.
The term ‘Net Zero’ refers to the zero emissions we would like to see greenhouse gas emissions reduced to, with any remaining emissions above that level re-absorbed from the atmosphere, by oceans and forests for instance. As of September 2022, 140 countries had made Net Zero commitments, and there were initiatives covering 8,307 companies, 595 financial institutions, 1,136 cities, 52 states and regions, 1,125 educational institutions and 65 healthcare institutions – all through the Race to Zero campaign.
In relation to climate change, our approach is guided by the belief that:
Given our strengths and our position in the market, we therefore believe that the key
objective of our Climate Change 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, and pursuing efforts to limit the temperature increase to 1.5°C, compared to pre-industrial levels.
We published our first Climate Change policy in January 2020 and identified five priority areas: Policy Advocacy; Product Governance; Portfolio Management; Persuasion; and Positive Impact. These and the associated actions 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.
Policy: We want policy makers to establish comprehensive and robust climate change policy frameworks. These need to 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 want there to be a range of climate resilient products available to our clients and the wider investment market that deliver substantial climate change benefits and are Paris-aligned. These investment solutions must help clients also meet their future investment goals.
Portfolios: We want our investment portfolios to be resilient under a range of climate change scenarios (both mitigation and adaptation). We want to adopt best practices on climate risk management and to work with our managers to further improve and develop our processes.
Positive Impact: 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.
Persuasion: We want the companies and other entities we invest in 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.
In our new 2023 Climate Change Policy we identify specific targets related to the five priority areas which are intended to ensure that our investment portfolios are aligned with the goals of the Paris Agreement on Climate Change.
Overall Strategy Target
We commit to be Net Zero by 2050, with the goal of limiting global temperature rise to 1.5°C and achieving Net Zero on our own operations (scope 1 and 2) by 2030. This commitment is made through the Paris Aligned Asset Owners, part of the Paris Aligned Investment Initiative (PAII).
Product Governance Target – Portfolio alignment
100% AUM in material (high impact) sectors in developed listed equities that are i) achieving Net Zero or ii) meeting a criterion considered to be aligned or iii) aligning by 2030, extending to all markets by 2040. Currently in scope are listed companies on the Climate Action 100+ focus list and companies in high impact sectors consistent with Transition Pathway Initiative sectors including banks. Brunel’s ambition is that by 2040 all listed assets are i) achieving Net Zero or ii) meeting a criterion considered to be aligned or iii) aligning. For a product to be on track for meeting its target, at least 80% of assets must fall into in the first and second categories. By June 2024, Brunel commits to setting alignment targets for corporate bonds, infrastructure, real estate and secured income consistent with the NZIF, and to develop a timeline for target setting in other assets classes.
Persuasion Target – Portfolio stewardship
Ensure 70% of financed emissions in material sectors are either aligned, aligning or subject to direct or collective engagement stewardship actions for all listed equity and corporate bonds by June 2024, increasing to 90% by June 2027.
Engage with 100% of investment managers and general partners1 on measuring emissions, disclosure levels and setting targets for decarbonisation and alignment by June 2024. Engage 100% of carbon-based energy and transport infrastructure assets as part of collective or direct engagement, or management interventions. Brunel Infrastructure portfolios have limited exposure to such assets and, where they do, it is often part of a wider programme of energy transition and/or efficiency.
With regard to our private markets’ portfolios more broadly, we will sequentially focus on our infrastructure, secured income, real estate, private equity and private debt portfolios, with the ambition of setting targets for the first three of these by June 2024.
Portfolios – Decarbonisation
Brunel Target: Reduce emission carbon intensity (scope 1&2) for all Brunel’s listed equity and corporate bond portfolios by 50% by 2030, using a trajectory of at least 7% per annum reduction, from baseline of investable universe as at 31/12/2019 (or appropriate subsequent date). Brunel also commits to set additional decarbonisation targets to cover separate Scope 3 targets to incorporate material sectors and other activities that will assist in achieving our overall goal no later than June 2024.
Public Policy Target – Sovereign debt 100% of UK sovereign issuance to be subject to direct or collective engagement. Brunel’s sovereign debt exposure is almost all UK-based and designed for the primary purpose of liability matching and therefore falls outside of the scope of the NZIF requirements. However, Brunel’s policy work continues to focus on the UK government’s Net Zero commitments and we actively participate in supporting implementation.
Positive Impact – Climate solutions
We commit to providing investment opportunities across asset classes to contribute to Brunel’s own alignment, which in turn allows clients to meet their climate solutions targets.
Brunel will provide annual updates as to the sustainable exposure, including climate solutions, of its infrastructure portfolios from 2023 onwards.
In our annual reporting, we feature numerous case studies of investments that specifically target climate solutions through decarbonisation and energy efficiency as well as climate adaptation and resilience. We plan to expand our reporting through developing metrics to assist with assessing the portfolios and to set targets in June 2024.
Brunel has adopted a clear hierarchy of its targets to prioritise real economy changes that will support the Net Zero transition. Priority is given to alignment, although current data availability limits scope of assessment. We also stress the need to look at performance across multiple metrics, as no one metric will be useful isolation. The prioritisation below solely relates to the targets – not the ambition or actions more broadly.
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. Further detail is provided in our Climate Action Plan (incorporating TCFD) and our annual Carbon Metrics Report showcases key carbon metrics by portfolio. Our ability to do more is constrained by the market.
In March 2021, we committed to be Net Zero by 2050 with the goal of limiting the global temperature rise to 1.5°C through the Paris Aligned Investment Initiative (PAII) Net-Zero Asset Owner Commitment, aka Paris Aligned Asset Owners. This requires signatories to set a direction and portfolio structure for alignment through governance structures, strategy, target and objective setting, and strategic asset allocation; it means shifting the alignment of assets to meet portfolio goals; and it means influencing the environment to facilitate alignment through policy advocacy and market engagement.
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 conduct our own stress tests of portfolios, comparing our equity portfolios against three Bank of England climate scenarios, using a free, open source PACTA tool. We will continue to ensure that climate change considerations are integrated into all the mandates that we award.
Brunel works collaboratively with others in the investment industry to develop critical climate tools and methodologies for the investment industry. Much of this work has been carried out through the IIGCC, with Brunel sponsoring the Paris Aligned Investment Initiative; supporting the development of the Net Zero Investment Framework; and submitting portfolio data to be run through a financial climate model to assess the financial implications of different climate change scenarios. This scenario analysis looked specifically at asset-side changes, including earnings impairments as a result of transition policies and demand changes.
We actively participate in and, where appropriate, provide leadership for investor collaboration initiatives, in particular the Transition Pathway Initiative (TPI), Institutional Investors Group on Climate Change (IIGCC), and the Principles for Responsible Investment (PRI). In the UK, we support the work of the Green Finance Institute (GFI) and the Sustainable Investment and Finance Association (UKSIF).
Our Chief Responsible Investment Officer has played a leading role in the European investment industry’s efforts on climate change. As Chair of the Institutional Investors Group on Climate Change (IIGCC), she has represented the IIGCC at various investment industry events, and has actively supported the IIGCC Policy Team in reviewing and responding to UK and European Union policy and regulatory proposals on climate change. Beyond the IIGCC, she has been appointed by the UK government to the Green Technical Advisory Group (GTAG) and to the Delivery Group of the Transition Plan Taskforce.
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.
For example, in equities, Brunel launched an active Global Sustainable Equities portfolio that uses strategy considerations of environmental and social sustainability in order to identify investment themes that contribute to society’s sustainable development. As at the end of June 2022, the portfolio had 11.6% exposure to green revenues Tier 1 and 2 compared to 7.4% in its benchmark, the FTSE All-World.
In private markets, Brunel has identified significant potential for investing in climate solutions, in particular in renewable technologies and sustainable infrastructure. Renewable energy investments are a core component in Brunel’s private market investments. At the end of 2021, these represented in excess of 35% of cycle 1 commitments and at least 50% of cycle 2 commitments within Brunel’s infrastructure portfolios.
Case studies can be found in the Climate Stocktake report. Brunel has also started work to more fully describe and report the level of its investments in sustainability-related themes.
As of the start of 2023, the rate at which capital is being invested in low carbon infrastructure is approximately half of that required; and the pace at which regulators and policy makers are acting is far too slow. We support the UK government’s commitment to make the UK the world’s first Net Zero-aligned financial centre as the nature of the investment system, and financial markets more generally, contributes to the challenge of addressing climate change, rather than supporting change.
If we do not have a financial system that is fit for purpose, we will not be able to respond effectively to climate change. We can take some specific actions, mitigating risk at the margin, but the impact will be limited without wider change. Our priority must be to catalyse change in the financial system at scale, not only through our own efforts but in partnership with others, and through enabling our clients to be agents of change in their own right.
Challenges we have identified include a focus on the short-term; an unwillingness to invest in the transition (at a scale and pace); a lack of products across all asset classes and markets; and risk models and benchmarks that don’t reflect climate risk, aggravated by the lack of a meaningful price of carbon.
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.
In relation to company engagement, Brunel has supported the development of guidance for private sector climate transition plans and sector expectations, for example ‘Investor Expectations for the banking sector’, with the expectation that companies will publish their climate transition action plan, and annually disclose emissions and progress against their commitments and targets.
A focus on physical risk, based on analysis of our own holdings, will add to our continued commitment to use the CA100+ benchmark and the guidance relating to transition planning as the basis for our listed markets engagement.
An area of focus is on driving real and substantial change in how investment managers invest. We expect them to think deeply about all aspects of how they invest and how they engage with the companies and other entities in which they invest. We challenge them to provide investment products that deliver on both our investment and climate change objectives.
In our 2023 Climate Change Policy we state that we will:
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:
Our regular reporting provides insight in these areas through our annual Responsible Investment & Stewardship Outcomes Report, which considers our performance on meeting our Responsible Investment goals, including on climate change. Further detail is provided in our Climate Action Plan (incorporating TCFD) and our annual Carbon Metrics Report showcases key carbon metrics by portfolio.
During the 2022 Stocktake, we assessed the effectiveness of the 2020 Climate Change Policy and the five-point plan. Clients had the opportunity to reflect on our progress and to shape our ambitions. We have published our Climate Stocktake: Implementation Review of the 2020 Climate Change Policy.
Brunel’s Stewardship Policy and Voting Guidelines both contain our voting guidelines on key topics. These set out our expectations of companies and their Board and management. We updated our Stewardship Policy in December 2021 to enhance the alignment of climate change engagement and voting.
Voting records are published quarterly on our website.
We want the companies and other entities in which we invest or which we 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 approach 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, and annually in our Responsible Investment and Stewardship Outcomes report. We also publish on our own plans in this area through our TCFD Climate Change Progress Report which reports on our progress on climate metrics and targets, including climate related engagements.
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. It is supported by 700 investors with over $68 trillion in assets collectively under management.
The Climate Action 100+ Benchmark was launched in March 2021 to assess the performance of focus companies against the initiative’s three high-level goals: emissions reduction, governance, and disclosure.
The Benchmark presents a key measure of the corporate progress of those 159 companies considered the most material globally on climate transition and the move to achieve Net Zero emissions by 2050 or sooner.
For a fuller explanation of our policy in this area, please see ‘Our approach to engagement and divestment’.
We do not issue exclusion lists as this means abdicating responsibility and accountability, we believe 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.
We expect our managers to materially reduce climate exposures and to be able to justify, robustly and credibly, any climate-controversial holding. Furthermore, if Brunel finds that its investment managers’ engagement with companies is ineffective, it will consider whether it should remove these managers and/or introduce specific exclusion criteria to be applied to companies.
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.
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.
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 three main strategies that we use to persuade companies and other entities to act on climate change, namely: (1) engagement via investment managers. (2) collaborative engagement, in particular through Climate Action 100+ (CA100+), and (3) direct engagement, including voting our shareholdings.
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 to have achieved Level 4 (the highest rating of their management quality) in the Transition Pathway Initiative and to have made meaningful progress towards aligning their business with a 1.5 degree or below pathway by this time. The oil and gas sector is a key focus for the CA100+ initiative which we are actively involved in.
We use the Transition Pathway Initiative (TPI) to assess companies’ preparedness for the transition to the low-carbon economy. We use the TPI carbon performance data to evaluate current state of corporate alignment. We challenge our material holdings to advance at least one level (up to 4*) per year on the TPI management quality framework. As of December 2021, within Brunel’s active equity portfolios there were 82 companies covered by the TPI tool. Of these, 41 holdings (62.7% by investment value) are categorised as Level 4 or above.
We use the CA100+ benchmark indicators to complement the TPI carbon performance data to define controversial holdings with respect to climate transition.
Our annual Carbon Metrics Report showcases key carbon metrics by portfolio.
We 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 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).
Our 2023 Climate Change Policy contains an action to challenge regulatory barriers to climate action and advocate for meaningful carbon pricing and cessation of perverse financial structures e.g. fossil fuel subsides. Carbon pricing is an essential element to stimulate mitigation strategies. 46 countries, or 30% of emissions (according to 2022 IMF figures), are currently covered by emissions trading and carbon taxes mechanisms but more is needed, not least coordination across countries. Linked to this objective is support for the development of robust and effective voluntary carbon markets.
We support the Global Investor Statement to Governments on the Climate Crisis which includes a call to governments for robust carbon pricing.