The UK’s £82bn (€98bn) Universities Superannuation Scheme is moving £5bn of its global developed markets equity allocation to a new climate index that will weight companies according to their emissions reduction performance.
The change affects both defined benefit and defined contribution assets, and is linked to USS’s ambition to cut its portfolio emissions to net-zero by 2050 if not before.
The new approach will be managed by Legal & General Investment Management, using a climate transition benchmark developed by USS and Solactive.
The shift to the benchmark will initially reduce portfolio greenhouse gas emissions compared with the broad equity market by at least 30%, and further decrease the carbon intensity by 7% each year thereafter. USS said all Scope 1, 2 and 3 emissions would be included from the outset.
A spokeswoman for USS told IPE the benchmark met EU climate benchmark standards.
The index is required to be overweight in companies that are successfully hitting adequate decarbonisation targets and must also not be underweight in high-impact sectors, such as manufacturing and construction, which are those deemed critical to the successful transition to a low-carbon economy.
The index also bars companies that rank poorly on the four UN Sustainable Development Goals (SDGs) relating to environmental sustainability and climate index, as well as companies that violate the UN Global Compact.
Simon Pilcher, chief executive officer of USS Investment Management, said the adoption of the index was “natural progression” to USS’s investment strategy following the announcement of its net-zero ambition. At the time, USS told IPE it was thinking about introducing a climate tilt in its defined contribution fund.
“We think we will be one of the first major UK pension schemes to do this and is a significant step towards achieving our net zero ambition,” added Pilcher. ”The move will also inform our thinking on the way we approach investment more widely in both the defined benefit and defined contribution segments of the scheme.”
Innes McKeand, head of strategic equities of USS Investment Management, said USS believed investment in more climate-friendly assets, which he described as those positioned to adapt or benefit as the world transitions to a low-carbon economy, offered upside return potential, while lower exposure to companies poorly positioned to adapt to such a world reduced the pension fund’s exposure to downside risk.
The news of USS introducing a climate tilt comes after the Church of England last week announced that its national investing bodies had added 28 high carbon-emitting companies to a “restricted list” because they failed to meet the investors’ latest climate change-related expectations.
Twenty companies have made climate-related changes to stay off the Church’s list since 2020.
Only £9.2bn Church Commissioners is invested in any of the companies on the new restricted list but it is not clear which ones, if any, beyond ExxonMobil as Church of England only discloses the Church Commissioner’s top 10 holdings and these do not include any of the newly banned companies.
With regard to ExxonMobil, the Church of England said the oil and gas company did not meet the “climate hurdles” established for 2021 but that the Commissioners will delay implementation of the ensuing restriction to continue their engagement with Exxon and support the three new board members elected following last year’s shareholder campaign, which was supported by the Commissioners.
USS is at the centre of a dispute between employers and university trade unions over the 2020 valuation of the scheme and ensuing action to address the affordability of benefits. University College Union, the union for academics, last week said 44 out of 68 USS pension branches now had a mandate for industrial action following reballoting.
Last year USS said a legal challenge being sought by a group of academics, including on the grounds that the pension scheme’s not divesting from fossil fuels was causing significant financial detriment, was without merit.
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