Room151 spoke to Jacqueline Jackson, head of responsible investment at London CIV, about the perks of economies of scale when it comes to tackling climate change.
The majority of London authorities have set ambitious net zero targets for their pension funds and London CIV itself plans to be net zero by 2040.
The pool has also published its responsible investment and stewardship report earlier this month.
London CIV currently manages £26.6bn in pooled assets and its partner funds hold a combined £48bn in assets.
But some partner funds have also made recent net zero investments outside the pool, raising the question: how important is pooling in achieving the net zero transition?
Room151: London CIV has ambitious targets on climate change; you want to be net zero by 2040. How do you reconcile that with your 32 partner funds who might all be at different stages in their transition?
Jacqueline Jackson: 30 of the London local authorities have declared a climate emergency and many have targets ranging from 2027 to 2050. While this doesn’t immediately translate into all pension funds, our clients’ ambitions are relatively strong; we certainly didn’t want to set a target that was holding our clients back. If anything we wanted to have an earlier target and a broad fund range that would accommodate all of our clients’ investment strategies.
As our progress towards the target takes off, I believe globally industry will accelerate action. There may be a bit of a delayed transition, but more momentum will begin to build both as investee companies accelerate towards their own net zero targets and the market moves, financial institutions divest and investment in new polluting sectors dwindles. There will be a natural shift. A huge amount of progress towards market achievement will be down to market momentum, as much as it will depend on individual action.
How important is pooling for your net zero transition? Can client funds achieve their net zero targets without being fully pooled?
You may be able to achieve your net zero targets without being fully pooled but pooling will no doubt provide major financial, operational and environmental efficiencies. For example, we are offering a climate risk analytics service for our clients. That will provide insight into which funds will perform better. Of course, we are also doing a lot of work and research on how we will get to net zero. For the client funds this means rather than researching their own funds, it will be a lot quicker and a lot more efficient to pool. We are already working on our own funds and driving towards our net zero by 2040 targets. Otherwise, they’ll need to implement or procure research for funds off-pool, understand the climate implications of different types of funds and structures, engage with fund managers and investee companies in order to adjust their portfolios accordingly, which is something pools the capacity to manage excellently.
So you’d be doubling up a bit.
Yes, it would be doubling up.
There are always a handful of familiar faces supporting these resolutions but then you get big investors, for example fund managers like BlackRock, StateStreet or Vanguard on the other side of the spectrum. Do you feel like there is a disconnect between asset owners and asset managers as Faith Ward has recently pointed out?
I do think some asset managers seem to be in a position where they are maintaining two very different client bases and, in that instance, there can be a disconnect between what asset managers and owners are doing. Asset owners only really answer to their beneficiaries or members. Asset managers seem to be juggling an array of asset owners, clients from different regions with divergent political viewpoints, and are receiving both pressure and lobbying to support companies despite the climate risks. Sometimes [they are] prioritising short-term interests over the long-term interests of pension funds. This is why it is important that shareholders have voting rights to engage on behalf of their investments and why manager engagement is a critical part of our strategy. It does beg the question, what happens in the future when we will see more passive investments? And if you are in a passive pooled fund, how do you think about going forward?
This is interesting because it comes at a time when there have been start-ups and setups which offer split voting arrangements for passives. Clearly, the market is asking for it.
Even some LGPS investors hold passive strategies, and some have also outsourced their engagement.
Yes, we have had questions even from our clients about opportunities to provide split voting services. Whilst I think this can diminish impact, if you are investing in a fund alongside shorter-term investors in the US and you’re a long-term investor based in the UK, you are obviously going to hold a very different opinion and approach in terms of how you choose to vote.
That is why it would be interesting to see to what extent it would sway activity. If all institutional investors had the opportunity to split votes and did so, what do we think the outcomes of those AGMs would be? Perhaps voting consensuses are a result of limited resources or the ability to engage individually.
The reason we hear from the same funds more consistently may be due to the fact that some asset owners have dedicated responsible investment functions. With specialised roles focused on responsible investment, climate and stewardship, it’s likely that these funds are more vocal on ESG matters, as dedicated staff members can spend all day looking at these issues. Conversely, there are plenty of asset owners who have members that care but simply haven’t developed, funded or built that sort of facility yet. That challenge may be the same with a range of different financial institutions worldwide.
Going forward, it will be interesting to see how much power responsible investment teams hold. If you told Jason Fletcher that you wanted the pool to divest from a fossil fuel producer, would he consider this?
Our CIO would support a decision to sell an investment if it is backed by sound reasoning from our Responsible Investment (RI) and Investment teams, and if all avenues of engagement with the relevant stakeholders have been exhausted. However, if the sale would violate the mandate of the underlying fund, we would engage in discussions with all investors and the investment manager to determine whether the Investment Management Agreement (IMA) or prospectus should be modified to allow for the sale.
In certain instances Jason Fletcher has demonstrated a cautious approach when confronted with shareholders demanding scope 3 transition targets from energy companies that refuse to engage on the matter, owing to the challenges associated for the sector. Interestingly, these companies have simultaneously promoted the scope 3 savings achieved by assisting customers in reducing their carbon footprints. Such flagrant disregard for the risks posed by scope 3 emissions can potentially make the CIO more open to discussing divestment or escalation strategies.
This type of discrepancy highlights the need for consistent and responsible practices within the energy sector. When companies refuse to acknowledge or address their scope 3 emissions while actively benefiting from promoting their scope 3 savings, it raises concerns about their commitment to long-term sustainability and climate change mitigation efforts. As a result, the CIO may be more receptive to engaging in discussions regarding divestment strategies or exploring escalation measures to hold these companies accountable for their actions.
The sustainable financial industry is rapidly realising that social priorities can very quickly translate into financial risks. This realisation has empowered RI teams to assert the significance of global ESG priorities, especially when they express dual materiality.
How do you measure your carbon footprint?
We have 25 different carbon risk metrics. We procure data from S&P Global using their platform and we then run our holdings data through that database, but we have automated it internally, so we can automate the calculation of our own footprint somewhat.
We also include all the standards metrics like weighted average carbon intensity, actual carbon emissions and we look at things like carbon earnings at risk based on transition risk and projected carbon pricing. We also look at 2-degree alignment and fossil fuel exposure.
When we first started our journey on tracking our investment process, we did use all the Trucost environmental metrics in order to uncover major culprits of GHG air and water pollution and identify hot spots of risk.
And how concentrated is that risk?
The issue here is that when it comes to things like land use risk, the data is less robust, which raises the question, is it really less material or is it simply less accurate? We have really focused on climate for now and I think the entire industry has.
I remember five years ago, everybody was talking about water risk, that was a big topic, and suddenly society has shifted towards a stronger focus on climate risk. But I think other factors such as water risk are coming back.
It is interconnected, isn’t it?
Yes, we might see a more holistic view when the TNFD [Taskforce on Nature Related Financial Disclosures] picks up. Hopefully we will move towards more holistic reporting in finance which treats all of these issues as interconnected, but I think we are still a couple of years away from that.
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