Right across our partnership, we share a deep commitment to Responsible Investing and welcome engagement on the issue.
Following extensive engagement with partner funds and many of their stakeholders we, the Brunel Pension Partnership, launched our Climate Change Policy in January 2020.
Our Policy is clear that the financial system is not fit for purpose to deliver a world that limits global warming to well below 2°C, ideally to 1.5°C. Our policy clearly states our commitment to support achieving Net-Zero well before the 2050 deadline.
The policy sets out a five-point plan to build a financial system which is fit for a low carbon future. This is essential as Brunel and all the Partnership funds operate within a regulatory framework – a framework very different to that in which charities, endowments or, indeed, asset owners and managers in other countries operate. It is essential we change the system, not just our portfolios.
To support making fundamental changes in our financial system, our strategy includes policy advocacy. We advocate mandatory climate disclosures, challenging fossil fuel subsidies and asking for positive policies to encourage actions that assist with decarbonising our economy. We support moves to apply a price on carbon, and to incentivise green investment.
However, we are not waiting on incentives. The managers of our sub-funds already invest extensively in renewable energy as well energy efficiency, public transport, smart grid and other technologies that support transition.
It is critical that we do not just focus on the supply side – the fossil fuel companies – but also on the demand side, looking at fossil fuel consumption, and at the wider financing of projects. When it comes to climate risk, we assess the whole value chain and engage with companies to take responsibility for their product throughout its usage, not just in its manufacture. (The examples below demonstrate the breadth of our engagement.) This issue is wider than climate change, hence our Responsible Investment Policy includes supply chain issues as one of its core themes.
We have also been very active in seeking mandatory climate disclosure. For example, Faith Ward, Chief Responsible Investment Officer, sits on the Pensions Climate Risk Industry Group, which was established by various government departments, including the DWP and Pensions Regulator. In 2020 the Group launched a consultation on a new guide to climate-related financial risks for pension schemes.
Our policy also identified the need to develop and decarbonise the products we offer. It is important to note that Brunel does not select companies to invest in itself. Instead, stock-specific decisions are made by the asset managers we employ. Our Partnership does, however, set the investment guidelines under which they operate. These guidelines are co-developed with all ten Brunel clients, which means we can create products that meet the requirements of pooling, most specifically on cost savings.
As background, our active portfolios have a low and declining exposure to fossil fuel companies, as evidenced in our Carbon Metrics Report. Standard practice is to use mainstream indices to gauge many aspects of our performance – the trajectory of these indices is well over 3°C. This is an industry-wide issue that arises from carbon not being consistently priced into assets – we know we need better solutions to make meaningful measurements. The Partnership is now working on a project to identify solutions that meet all client investment objectives, specifically long-term investment returns, in a cost-effective manner. (Please note that details of holdings in our client funds can be obtained from the councils themselves, usually from the council website.)
On the issue of divestment, Brunel supports divestment from specific fossil fuel and other carbon-intense companies, if they present a material investment risk – such as due to ‘stranded assets’ – but this is based on analysis by our asset managers. Brunel expects managers to take these decisions independently.
In addition, we have committed to review this approach and, indeed, the holdings themselves; and to evaluate whether companies are taking steps to manage climate risks and to enable our overall alignment with the Paris Agreement. Brunel set out clear expectations for its asset managers and a deadline of 2022 for reviewing companies – our climate stock take is due in 2022. The criteria to evaluate companies and managers is being developed with our clients. It will take into account different investment mandates and starting points, but always with reference to Paris alignment.
We chose not to use exclusion lists with our active managers. Instead, we require them to analyse the companies and other entities they invest in, and to justify their investments in those companies with higher greenhouse gas emissions. We do not currently issue exclusion lists because what is most needed is change in the way investment managers work. Simply enforcing 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 they hold. Climate then becomes a technical operational matter, not an investment priority.
However, we acknowledge that we may need to take other action and have reserved the right to implement specific, and stock-specific, exclusions as part of our Climate Stock Take in 2022.
However, while we will not instruct managers to exclude certain stocks, we do expect their portfolios to have materially reduced climate exposures. We also expect them to justify any climate-controversial holding. If investment managers are not able to explain their investment strategies robustly and credibly, and to lay out how they have managed climate risk, we will look to replace them.
If we find that our investment managers’ engagement with companies is ineffective – and that the companies’ trajectory is therefore not Paris-aligned – we will consider whether to remove those managers or introduce specific exclusion criteria for the companies concerned.
As we take steps to address climate change we are transparent about our holdings, the climate intensity and fossil fuel exposure of our portfolios, and the outcomes of engagement. These are consistent with the expectations of the Financial Reporting Council’s 2020 Stewardship Code and Taskforce for Climate Related Financial Disclosure – indeed, in many places, we exceed them.
More recently, we helped to develop and launch the IIGCC Net Zero framework, the first practical framework to guide asset owners and managers seeking to become Net Zero investors. While we are pleased with this progress, we also acknowledge that both climate change policies and findings from investment data continue to evolve and, in line with this, we continue to review our own policies.
We have provided some examples of engagement that directly and indirectly relate to investment in fossil fuels.
It is important to note that the commitments made by BP, Shell and Glencore include scope 3 emissions, to one extent or another. This means that commitments we are seeing coming through are getting closer to meeting our need to cover the complete supply chain of the product e.g. the consuming, purchasing and then burning of fuel.
Engagements with asset managers on climate change
To read more about our position, including our view on carbon pricing and detail on why we co-filed the Barclays resolution, please see the FAQs section of the Climate Change section of our website.
This content is produced by Brunel Pension Partnership Limited (Brunel). It is for the exclusive use of the recipient and is neither directed to, nor intended for distribution or use by others, including any person or entity who is a citizen or resident of or of any jurisdiction where distribution, publication or use of this document would be contrary to applicable law or regulation.
This content is provided for information purposes only. It does not constitute advice or an offer or a recommendation to buy, or sell, securities or financial instruments. It is not intended to be relied upon by any person without the express written permission of Brunel.
Authorised and regulated by the Financial Conduct Authority No. 790168