The Client: Semi-Public Sector Department
The Brief
The science and evidence underpinning global concerns surrounding climate change is concrete. Pension schemes, as a proportion of total assets under management, account for the majority of the institutional investment market and therefore have a key role to play in the fight against climate change, through the responsible allocation of capital and stewardship.
The single biggest contributor to climate change is emissions from fossil fuels. When fossil fuels are burned they release large amounts of carbon dioxide, a greenhouse gas, into the air. Many commentators believe that in order to halt the impending effects of climate change, and to limit global temperature rises to 1.5 degrees Celsius, it is crucial that investment in fossil fuel companies is reduced and capital is allocated to “greener” companies i.e. those that do less harm to the natural environment.
In light of these concerns, a trustee board approached Quantum Advisory to help them define a clear policy on fossil fuel investments and to help mitigate some of the risk that climate change poses on the scheme’s investments.
Training and information gathering
We started working with the trustees and provided training on the history of responsible investing and the various approaches that can be adopted, helping the trustees to set their objectives and focus on their core beliefs. Following this, we provided information on products available which could help the trustees meet their objectives.
The Results
The first step, in conjunction with the trustees, was to help design a robust policy to manage the scheme’s level of fossil fuel exposure with the ultimate aim of reducing the scheme’s investments in the global fossil fuel industry over a five-year period. This involved reviewing the scheme’s existing direct investments and third-party investment managers and considering alternative options for implementing the scheme’s strategy, without compromising on the return expectations of the portfolio, or amending the risk / return characteristics of the portfolio.
The following changes were implemented immediately:
- The existing equity fund, with no specific ESG criteria, was replaced with an equity fund which explicitly incorporates ESG considerations and makes use of exclusionary measures.
- The existing multi-asset fund, which had a significant direct exposure to fossil fuels, was replaced with an alternative which has been specifically designed to address key ESG factors, with no direct exposure to the oil & gas industry.
As a result of these actions, the scheme’s overall direct exposure fell by over a third in year one and continues to fall as further changes to the strategy are implemented. Performance has remained strong and the risk characteristics of the portfolio remain comparable to the original portfolio. Quantum Advisory continues to work with the trustee board to monitor the scheme’s exposure and identify areas that can be improved upon further, where possible.