The UK’s £3.8bn (€4.2bn) National Employment Savings Trust (NEST), with over seven million members, is to begin considering how physical impacts of climate change may affect investments it has made in its “climate aware” fund, the pension scheme has said.

The next stage of the development of the fund would consider how phenomena such as sea level rises, flooding, hurricanes and droughts might influence companies based on their physical location, and hence the value of the scheme’s investments, the multi-employer scheme said in its 2018 responsible investment report.

“Impacts might include transport networks in extreme weather regions becoming unavailable, or heavy industry and refining close to the coast becoming unusable,” it said. 

Schroders recently warned investors against overlooking the physical risks of climate change – as opposed to transition risks stemming from steps to limit temperature rises.  

So far the fund, which NEST developed in partnership with UBS Asset Management, has been focussed on investment risks and opportunities linked to efforts to stem climate change. NEST adopted it for its default strategy in February 2017 and, at the end of June, managed £624m of assets.

In its first year the fund performed better than the FTSE World Index. NEST acknowledged that this was a short time frame and that the differences were small but said they were statistically significant so far.

According to analysis it carried out, one potential reason for the improved performance was that the share price of companies in the fund responded better to negative climate-related news than the benchmark, it said.

“We’ve successfully identified more resilient companies, which even in the face of negative climate change news are maintaining their value better”

NEST said it took all the important climate-related news stories it could find in major media publications over a six-month period and measured the investment performance of its climate aware fund and that of the FTSE benchmark index and a control fund for five days after each news story was published.

“On average, each time a negative news story about climate change was published, the investment value of the control fund and benchmark lost more money,” it said.

“This suggests that we’ve successfully identified more resilient companies, which even in the face of negative climate change news are maintaining their value better.”

Over a year, added NEST, these small differences added up and contributed to the overall outperformance of its climate aware fund.

Compared with the benchmark, NEST’s investment in the fund meant it had about 21% – £133m – more invested in companies that were positioned to benefit from a global transition to a low carbon economy, including renewable green technology companies such as Xinyi Solar Holdings.

Conversely, it had withdrawn the same amount from companies not making progress on adapting for a low-carbon future; companies such as Duke Energy, ExxonMobil and Royal Dutch Shell were affected by this.

The climate aware fund tracks the FTSE Developed index but over or underweights companies depending on whether they stand to benefit or lose from the move to a low carbon economy. NEST seeded the fund with about £130m and has since increased its allocation to 30% of its global developed equities in the growth phase of its default strategy, and 40% in the foundation phase.

‘Members want responsible investment’ 

Almost three-quarters of NEST members who participated in a survey wanted their pension scheme to invest responsibly, the auto-enrolment provider has said.

Just under half of those surveyed – 47% – said it “matters a lot” to them that their pension scheme considers how the companies and markets they invest in are run and how they “treat people and planet”, NEST reported.

A further 26% said they agreed with this if it produced better returns, while 12% said it did not really matter to them at all.

Research commissioned by the multi-employer scheme also found that savers’ levels of trust, interest and confidence in pensions were boosted by hearing about how their pension was invested responsibly.

NEST gave a sample of its membership some information about what it did as a responsible investor, and found that half of those surveyed said the information improved their impression of the scheme. Some 44% said it made them more interested in their pension and 45% agreed it made them feel more confident about saving with NEST.

The master trust also found that 63% of savers wanted to hear more about responsible investment from their pension scheme.

Diandra Soobiah, head of responsible investment at NEST, said: “A potential £495bn will flow into workplace pensions over the next 12 years, making workers more powerful shareholders with a major stake in how companies and markets are run.

“They’re telling us they want this money invested responsibly, which could improve the environment and society they’ll live and retire in as well as their future bank balances.”

The scheme said it was encouraged by the survey results. It said it would continue to invest “to achieve good pension outcomes by considering the wider impact of corporate behaviour on people and the planet”.

NEST’s latest annual responsible investment report can be found here .

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