Normalizing the disclosure investors require to make sensible decisions.
The Environment Agency Pension Fund (EAPF) is a public pension scheme in the UK with over 40,000 members and assets of about £3 billion. Although relatively small in terms of assets under management, EAPF is well known for punching above its weight when it comes to responsible investment winning multiple awards for its ESG implementation and quality of its climate change reporting.
Faith Ward, Chief Responsible Investment and Risk Officer at EAPF, explains that over the 14 years she has worked there the emergence of CDP has transformed the fund’s ability to access the data it requires to implement its investment strategy.
Historic changes
Ward explains, “When I started working with the fund around 2002 it was very challenging to get the disclosure we needed to make sensible decisions. Most fund mangers did not go beyond asking which companies we wanted to exclude. But CDP has helped normalize the disclosure of corporate ESG data, especially on climate change.” She cites increasing regulation as another catalyst for better disclosure and adds that, “In jurisdictions like the US where there is no mandatory requirement CDP continues to really help drive environmental data disclosure.”
The improvements in mainstreaming of corporate environmental disclosure has allowed EAPF to take a strategic fund-wide approach to managing its environmental impacts, including publishing its highlyacclaimed Policy to Address the Impacts of Climate Change in October 2015. This policy meant EAPF became one of the first pension schemes to run its assets in accordance with the UN-agreed principles of preventing global temperatures from rising by more than 2°C. “We consulted several stakeholders when putting together this new policy,” explains Ward, “And CDP was a very useful contributor to this process, providing a wide network of expertise and helping us think about how to set clear goals for the decarbonization of our fund underpinned by quality disclosure”
An asset owner driving change along the value chain
All the assets of the EAPF fund are selected by external fund managers, thus EAPF places great importance and high levels of time and energy into recruiting and supervising fund managers who have the skills needed to consider environment-related issues across all asset classes. “We ask current and prospective fund managers what data sources they use in their investment process and would respond positively to those who can show they use CDP data. The CDP dataset empowers us to talk to fund managers constructively about the opportunities and challenges in different companies and in different asset classes.”
She adds, “CDP’s sector reports are also a great help. The rankings and results in those benchmarks help us, in a sense, to be more intelligent clients. We can go to our fund managers and speak on a level about the methodologies they use to assess a companies climate management. For smaller funds such as ourselves, or lay trustees, that is very helpful.”.
EAPF also asks fund managers to engage underlying companies on its behalf to improve the extent of a specific company’s disclosure to CDP. For example, the fund recently engaged with leading insulation manufacturer Kingspan and Chinese energy company China Longyuan around the quality of the environmental data they disclosed to CDP. In both cases, reports Ward, the fund has not only seen the quality of their disclosure improve, but also improvements in the overall carbon management at both corporate entities.
EAPF also encourages its portfolio companies to disclose to CDP Water and Forests where relevant, and have successfully engaged with the likes of Tesco to complete the CDP Forests questionnaire.
Measuring the fund’s environmental footprint
EAPF undertakes environmental footprinting of its active equities and bond portfolios, and CDP data is a key part of the methodology for this exercise. This exercise is slightly wider than measuring just the carbon footprint as it includes a company’s supply chain and waste outputs – and much of this data is found in CDP questionnaires.
Ward adds, “Our environmental footprint continues to improve. In 2016 for example, our active equities were found to be 10.9% more environmentally efficient per CDP consulted with Environment Agency Pension Fund on the formation of their highly-acclaimed Policy to Address the Impacts of Climate Change. million pounds invested than the market average. One of the reasons for this is the improvements in the scope and accuracy of the data we are able to access”.
Looking to the future
The challenge of normalizing the disclosure of environmental data continues.
“Looking to the future,” concludes Ward, “We believe it is very important that CDP aligns with the likes of the French Ministry for the Environment and Michael Bloomberg’s Task Force on Climate-related Financial Disclosures to ensure investors have broadly aligned disclosures from companies on material environmental factors.”
Just as CDP helped revolutionize corporate disclosure in the last decade, a new challenge presents itself in the coming years.