People's Pension revamps net zero strategy amid climate challenges
The People's Pension, which invests on behalf of some 7m members in the UK, has confirmed an overhaul of its net zero ambitions, recognising that the world is increasingly off track to limiting global warming to 1.5°C, adding that "the business case for a low carbon transition has been variable across regions and sectors."
In doing so, the pension fund aims to take an evidence-based approach that supports climate actions whilst protecting member's savings argues Dan Mikulskis, CIO of People's Partnership. "Our industry understanding on how to do this effectively has materially changed since we set our original portfolio-level target in 2019, and we have a fiduciary responsibility to evolve and adapt to those developments. Additionally, there is seven years of evidence on market-wide decarbonisation and policy change that we believe needs to be adapted to. We believe the retention of a Paris-aligned ambition is important, but it must be rooted in bottom-up realities as to the role that investors can play in achieving it to ensure better outcomes for our members".
The master trust is replacing its top-down '1.5°C aligned portfolio' (limited to no overshoot) target as an investment constraint with a bottom-up approach to reflect differences across markets, asset classes and sectors, the fund said. Consequently, target setting will be considered on a case-by-case basis.
"Climate change is not a fixed challenge; it shifts as science evolves, markets adapt, and political winds change. To do this responsibly, we felt it was prudent to go back to first principles routed in evidence: real data, academic research, and honest analysis" emphasises Leanne Clements, head of responsible investment at the People's Pension.
This bottom-up approach will be supported by systemic stewardship-led strategy with a strong focus on industry and policy engagement, she adds. The fund says it will continue to have a net zero ambition that is aligned with the Paris Agreement.
The People's Partnership's announcement comes after net zero investing has faced growing public scrutiny, with major institutional investors exiting from net zero alliances as the US administration in particular has taken on an increasingly hostile stance towards climate investing. Emboldened by this, and driven by a growing focus around energy security in the wake of Russia's invasion of Ukraine, some of the world's largest energy majors have scaled back their commitments to renewables and instead doubled down on fossil fuel extraction.
Against this growing backlash, some investor coalitions, including the Net Zero Asset Owner initiative, have responded by abandoning hard net zero by 2050 targets. However, major asset owners have so far held back from publicly scrutinising their net zero targets, though it is far from uncommon to adopt a net zero "ambition" rather than a hard target. Similar language is used among others by the New York City Pension Funds, which pursue a net zero ambition, and by USS, the UK's largest corporate defined benefit fund.
One notable exception is CPPIB, Canada's largest pension plan, which last year faced mounting public scrutiny after it stated that it no longer pursues a net zero commitment. CPPIB's move was motivated by a combination of regulatory pressures in Canada and growing recognition that its portfolio was increasingly off track to meet net zero ambitions. Indeed, the fund has long been a significant investor in the Canadian fossil fuel industry, having committed more than £7bn to Canadian oil and gas pipelines over the past two years alone.
However, the move faced legal backlash from members, who argued that the fund was breaching its fiduciary duty to protect savers' pensions from climate-related risks.
For the People's Pension, much now hangs on how this revised approach translate into investment decision making. Unlike CPPIB, the People's Pension is to date predominantly invested in listed assets and does not feature major private market allocations to the fossil fuel industry. Its biggest contributors to portfolio emissions include steel and materials companies which would also play a vital role in the transition, ranging from Chinese cement manufacturer Anhui over Tata Steel to Swiss building materials company Holcim Ltd, according to its latest TCFD report.
Having last year shifted its portfolio towards segregated mandates, the master trust now has greater flexibility to adjust its allocations to high emitters. Shifting towards a bottom-up approach to reflect industry differences between markets and sectors could in theory allow it to divest from fossil fuels, but could also enable it to to increase allocations, based on the argument that the business case for a low carbon transition was variable, as the fund put it.
When quizzed on this by our website, the fund declined to provide further detail, adding instead that it was now in the process of reviewing the impact of its new climate strategy on existing mandates. The fund did say that it would "investigate the benefits of an investment strategy of favouring transition leaders within carbon-intensive sectors." However, against the context of major energy giants doubling down on fossil fuel extraction, that bar for that constitutes best-in-class might have just dropped considerably lower.
To date, there are few examples of institutional asset owners who have outright divested from oil and gas, the Church of England Pension Fund and Wiltshire Pension fund being notable examples. Major Dutch pension funds, including ABP and PFZW have also sold off a significant proportion of their fossil fuel holdings. At the same time, a growing number of asset owners are embracing bottom-up analysis on the transition-readiness of individual firms such as the Transition Pathway Initiative or the UK's newly launched Transition Finance Council guidelines.
Over the past two years, the People's Pension has made the headlines with a significant manager overhaul which was at least in part motivated by the desire to select managers more aligned with its climate beliefs. How it now plans to implement its new climate strategy across existing and new mandates, notably its new private market allocations later this year, could send a vital signal on net zero ambitions for the wider industry.
