Editor’s note: ImpactAlpha contributing editor Imogen Rose-Smith, a longtime senior writer for Institutional Investor, contributes a bi-weekly column on the policies, practices and strategies of the largest asset allocators, including pensions, foundations, and endowments. As Imogen says, she’s “tracking what investors do, not just what they say.”
ImpactAlpha, Oct. 14 – You think raising the debt ceiling was contentious?
Imagine the legislative fistfight if the U.S. House of Representatives took up legislation to divest the entity that manages retirement benefits for members of Congress from fossil fuels.
Can you see a Republican president meeting with global leaders urging urgent action on climate change? Not going to happen. Or local and state GOP leaders championing low- or no-carbon transportation systems. Unlikely.
Yet in the U.K, where Conservatives have led the government since 2015 and a right-wing Prime Minister is beloved by his Tory base, these heresies barely raise an eyebrow.
During last month’s Climate Week and the U.N. General Assembly, the British contingent was all over climate change. It was impossible to attend an event without hearing a British accent. Prime Minister Boris Johnson popped off constantly for bilateral climate summits with U.S. President Joe Biden and other leaders. It was Johnson who, as mayor of London, introduced free bicycles – Boris Bikes. (And, by the way, Brits aren’t surprised that BoJo can speak French – he did go to Eton. We’re just surprised every time he opens his mouth without insulting someone and keeps his trousers on. It’s a low, low bar.)
The U.K.’s recent prominence on climate change in part has to do with the fact that COP 26 is taking place in Glasgow, Scotland, which is still, reluctantly, part of the United Kingdom. That’s why Alok Sharma, the MP that Johnson appointed President of COP 26, is showing up in your news feed every day. Anxiety over the U.K.’s exit from the European Union means the country has to look like a player on the world stage.
And Brexit notwithstanding, the people of the U.K., like most Europeans and unlike some Americans, actually believe climate change is real and recognize the urgent need to do something about it. It may help that the U.K.’s coal industry was more or less killed off by pit closures (which crescendoed under Conservative icon Margaret Thatcher over the massive objections from labor unions and the left). North Sea oil and gas revenues peaked in the 1990s.
Bring all of that together and the Brits, like the French before them, look to be taking climate change very seriously indeed. And it’s not just politicians, on both sides of the political divide. Climate serious extends to corporate boards and institutional investors.
It’s not all good news from across the pond.
The U.K. has its own share of climate deniers and skeptics, including some prominent Tory backers. Fuel shortages and gas station lines show just how dependent the U.K. is on oil and trucking. And it must be galling to world leaders to have Boris Jonson, well known for having the attention span of a toddler, telling them to “grow up” and face climate change.
Like most institutional asset owners, U.K. pension plans rely on outside managers to do their investing. The U.K. has a smaller asset management industry than the U.S., so the same handful of public equity investment managers often show up in pension plans, especially in the public sector. These managers include names like New York-based BlackRock, London-based Schroders, and Edinburgh-based Baillie Gifford. Many U.K. investors seem happy to let the asset managers do their ESG engagement for them.
The net result is that these U.K. investors are outsourcing much of the responsibility of driving change in corporate behaviour to the investment management industry. On the one hand, this means that money managers like BlackRock now have an interest in championing climate-friendly solutions and outcomes (such as voting in favor of a new board slate at ExxonMobil).
On the other, it leaves asset managers in the driver’s seat when it comes to making ESG decisions. And these investment funds are money managers, not climate warriors. How hard are they really going to push for change? The answer to date has tended to be: Not very much at all.
U.K. institutional investors – like investors around the world – are by nature conservative. Most want to be followers, not leaders. They are not set up to make the kinds of massive changes our economy needs. Even seemingly minor changes can be too much for them.
That caution makes it virtually impossible for these pension plans to act with the type of urgency the climate crisis demands. Letters from Larry Fink ain’t going to cut it in the climate change apocalypse, when major parts of the British Isles are under water. U.K. institutional investors might be winning the political battle – recognizing the risks of climate and reducing their fossil fuel exposure – but they remain a long way from making substantive long-term investment changes. And we’re running out of time.
Take, for example, the U.K. parliamentary pension plan.
In 2019, following a campaign supported by MP’s from all parties, the trustees of the £700 million Parliamentary Contributions Pension Fund, or PCPF, announced it would look into the risks of climate change to their investments. A year later, the PCPF’s annual report showed that the new Responsible Investment policy had cut the fund’s fossil fuels exposure by over £10.2 million. Not the total divestment that activists were calling for, but significant progress nonetheless.
In 2021, the PCPF “will reduce the portfolio’s carbon emissions intensity by at least half, without negatively impacting performance,” according to its most recent Stewardship Report. The fund has adopted “a sustainable and low-carbon approach to our passive equity assets, made an investment in a renewable infrastructure fund and has agreed to allocate further assets to an additional environmental or social infrastructure fund during 2021.” After a review, the trustees switched the fund’s index portfolio to a low-carbon index fund.
The PCPF manages only around £700 million, a drop in the proverbial bucket. But 44% of that money is invested in passive global equities and PCPF has given a mandate to both BlackRock and Schroders to switch to the low-carbon index accounts. That kind of direction from an asset owner is a big deal – and something that I tried and failed to achieve at the U.C. investment office in my two years as an investment fellow. And it costs the pension plan, basically, nothing.
Like other pension plans in the U.K., the parliamentary pension fund puts an emphasis on proxy voting and shareholder engagement. It is “vital that we continue to monitor the voting and engagement activities of our equity managers,” say the Trustees, who took one of their equity managers to task over concerns about its 2019 voting record. Last year, the fund “took the opportunity to challenge the manager and requested they provide justification on some of their individual votes,” though, unsurprisingly, the fund is still with the manager.
The PCPF relies heavily on its external managers, especially BlackRock, to do the work of engagement, voting, and, of course, investing. Not only does BlackRock manage a large percentage of the new index fund for PCPF, it is also the manager of PCPF’s Real Estate holdings and is the fund manager for PCPF’s new energy infrastructure investment.
As a longtime subscriber to the U.K. satirical publication Private Eye, I’m compelled to point out that former U.K. Chancellor George Osborne (part of the ill-fated coalition government that brought us Brexit. Thanks, guys) is a paid advisor to BlackRock. In 2015, in an effort to balance the U.K. budget and right before the Paris climate talks, Osborne cut £1 billion in promised climate related spending. In 2013, he said he did not want the U.K. to be a leader on the climate crisis, lest the U.K be priced out of the oil and gas markets.
Carry on, Strathclyde
Political views, and winds, change, of course. The Strathclyde Pension Fund, overseen by the city council of Glasgow, host of COP 26. With £27.5 billion in assets, Strathclyde is one of the largest ‘local authority scheme’ pension plans in the U.K. It has been a target of activist pressures to divest from fossil fuel.,
A progressive bunch, the council has seemingly taken action with its pension plan on climate change, inequality, and other ESG related issues. The council which was controlled by the U.K ‘s left leaning Labour Party from 1980 to 2017. It is now run by a coalition headed up by the Scottish National Party.
This past June, trustees ruled that the pension plan would end investments in fossil fuel firms that fail to act on the climate emergency. The vote was hailed as a victory at the time; very little has actually happened.
At the September 8 meeting, the last before COP 26, investment staff put forward a plan to identify, and potentially divest from, fossil fuel companies that weren’t moving in the right direction. None of the companies held by the pension scheme met the criteria for divestment. In other words, Strathclyde’s actions amounted to a whole lot of nothing.
Trade union representative James Corry, an advocate for divestment, told Glasgow Times he was “underwhelmed” by the fund’s action when “clearly, this is the time to show decisive action.” Councillor Martha Wardrop captured the “sense of frustration that we’re not moving fast enough on this agenda.”
Strathclyde could do more. After an investment strategy review by its investment consultant Hymans Robertson, Strathclyde could invested in the Baillie Gifford Global Alpha Paris Aligned Fund. This is an investment fund launched in 2000 by the $487 billion Edinborough, Scotland-based investment manager to target investments in companies aligned with the carbon emission reductions in the 2015 Paris climate summit (officially known as COP 22.
Staff advised, however, that the Baillie Gifford Global Alpha Paris Aligned Fund “is unrated and largely untested,” and declined to propose the strategy. Instead the fund was advised to invest in the traditional Baillie Gifford Global Alpha Fund.
The Global Alpha fund has risen to prominence for its investment in Elon Musk’s electric vehicle company Tesla. The two strategies, one Paris Aligned, the other not, have an over 95% overlap of securities. How hard would it have been to take the leap? How is this even a leap? We’ll be balling the Glasgow Airport runway out with dustbins and sandbags by 2050, but you do you.
As cautious as Strathclyde has been in its equities portfolio, it is actually quite progressive in some of its private markets activities. Established in 2009 and now called the Direct Investment Portfolio, the portfolio allocation is 5% of the overall pension plan, and it invests mostly in funds that have to do with climate change or social inequality. DIP investments have included offshore wind, Strathclyde real estate development, and early stage U.K. life science companies among others.
U.K. pensions are likely to do more of these kind of targeted ESG investments, for economic, commercial and political reasons, post COP 26. London’s relatively new LGPS CIV investment fund already has a jump on the strategy.
London CIV was formed in 2015, and invests the pooled assets of 32 of the UK’s 86 local government pension schemes to deliver, as it says “value for Londoners through long term sustainable investment strategies.” It aims to achieve double bottom line objectives through “investment in real estate, infrastructure and growth capital sectors in Greater London.”
The £11.5 billion London CIV creates funds that invest in things that are good for London. Last year it launched a Renewable Infrastructure fund. Seeded with £435 million from five anchor CIV investors, the capital is managed by BlackRock (again), Foresight Group, Quinbrook Infrastructure Partners and Stonepeak Global Renewables Advisor. London CIV expects an additional six clients to invest a further £300 million.
Local government pension schemes (like public plans in the U.S.) are investing because their clients, public workers, favor these kinds of investments in climate solutions and even some level of social welfare as a mainstream part of the political discourse in the U.K. The CIV is an investor in the Baillie Gifford Global Alpha Growth Paris Aligned Fund to the tune of £500 million.
Back in the U.S. of A.
London CIV, Strathclyde and PCPF all go to enormous pains in their reporting to demonstrate just how much they are doing when it comes to ESG. Even if, or when, the reality amounts to very little. The level of detail and documents that are devoted to ESG and Responsible Investment, however, further points to the fact that this type of activity is now central to the work and operations of these funds, expected, and encouraged by stakeholders.
London CIV and Strathclyde are proud 2020 signatories to the U.K. Stewardship Code, a list of money managers, asset allocators, and service providers that the U.K. regulatory body, the Financial Reporting Council, deem to have met a dozen standards of stewardship.
U.K. pension schemes will be encouraged to make more clean energy infrastructure and similar type investments going forward. Will U.S. funds do the same?
The number of U.S. pension plans that are really thinking through the clean energy transition remains distressingly small. Few plans have dedicated portfolios, even fewer at a meaningful scale. Many U.S. pension plans do have programs to invest locally, but they tend to be small and lack an explicit ESG agenda.
As for that parliamentary pension fund, the U.S. version managed by the Federal Retirement Thrift Investment Board should be aware of its fossil fuel problem. In May, the Government Accountability Office put out a report, “Retirement Savings: Federal Workers’ Portfolios Should Be Evaluated For Possible Financial Risks Related to Climate Change” that looked into the climate change risk to FRTIB’s $565 billion investment portfolio, which is entirely indexed.
The GAO recommended that the pension system find a way to address climate change going forward. In response to a draft of the report, the FRTIB took objection to the suggestion that it “does not currently have any knowledge” of the risk of climate change. That note was deleted from the final published document.
Instead, FRTIB executive director Ravindra Deo provided a statement that basically come down to, “The markets will take care of the problem.” In March, House members introduced the ‘Restructuring Environmentally Sound Pensions In Order to Negate Disaster,’ or RESPOND act. The legislation would force the FRTIB to set up an oversight board to address climate change.
Don’t expect Congress to respond. After all, it only just managed to keep its lights on for a few more months.
Imogen Rose-Smith is a contributing editor at ImpactAlpha. A longtime senior writer for Institutional Investor, she was most recently a fellow in the Office of the Chief Investment Officer of the University of California.