Making climate awareness a default option.
NEST is a state-backed workplace pension provider in the UK with approximately four million members and £1.5 billion of assets under management. NEST’s AUM and membership is set to grow substantially in the coming years as the UK implements new rules that automatically enroll employees into a workplace pension scheme. The scheme believes that an important part of growing members’ money is investing it responsibly and sustainably.
Data underpins climate risk assessment
“Climate risk is something we started looking at around three years ago”, explains Diandra Soobiah, Head of Responsible Investment at NEST, “And it became clear from our conversations with many stakeholders that climate change was a financial risk we need to take seriously to ensure better risk-adjusted returns for our members. CDP data is an essential part of helping NEST to evaluate both climate risks and opportunities.”
Much of the day-to-day management of NEST’s assets is done by fund managers and CDP often features in NEST’s manager selection process. “For example we will ask managers for some mandates where they get their data and would expect them to name CDP as one of the sources to show that climate change gets serious consideration in their process. If they don’t know CDP, that would raise a serious flag about whether they manage climate risk,” says Soobiah. She adds that NEST will now have a clause built into its manager contracts that obliges relevant fund managers to report on climate risk, and that this is likely to involve CDP data.
CDP’s data not only helps NEST to identify the largest carbon risks in its portfolio it also provides some focus for NEST’s engagements. Soobiah adds, “For example, the Scheme has engaged with several utilities firms and others to encourage them to report to CDP. Companies know CDP, and we see it as a benchmark standard for corporate environmental reporting.”
New climate aware fund rewards better performance on climate
In March 2017 NEST invested £130m, around one fifth of its current developed markets equity portfolio, in a Climate Aware World Equity fund managed by UBS.
The fund uses a series of tilts based on a ‘glide path model’ constructed by UBS and NEST. The glide path model sees the fund invest more heavily in companies that have been identified as making a positive contribution to combating climate change. CDP data is part of the formula that helps UBS assess the climate performance of each company.
Soobiah explains, “The emissions targets that companies report to CDP help us to assess whether a company is behaving in way that aligns with the path the world requires to keep temperature rises below 2 degrees. The glide path model means we can reward those companies that are on the right path, and reduce our exposure to those that are not”
She gives the example of British energy company SSE, which has high levels of emissions but, she argues, ‘Also has significant levels of renewables in their energy pie which means their absolute carbon emissions and carbon intensity are coming down and thus positions them well on the glide path”. She also gives the example of German electric utilities company RWE, which has a big allocation to coal but has extensive plans in place to close down many of its coal-fired plants and re-allocate these resources to wind.
The Climate Aware Fund incorporates qualitative information which includes whether companies disclose to CDP and triggers a process that sees NEST engage with them to encourage better climate disclosure and vote against their audit reports if they do not see change.
The fund is set to grow over time and, innovatively, NEST has decided that younger members - who are more likely to be affected by climate change - will be given a greater exposure to the new fund than older workers. This is because older employees are closer to retirement and less likely to be affected by the transition to a lower-carbon economy.
Soobiah concludes, “The world is changing and it is down to investors like us to support that change. We cannot afford to ignore climate change risks and we have committed to being part of the solution.” She says the fund has been especially well received by younger members of the scheme, such as millennials, and this helps with member communications.
Soobiah adds that CDP’s quarterly sector reports are also very helpful for the fund, commenting, “When setting up the climate aware fund we referred to the CDP oil and gas report (In the pipeline), and that was a really good checking mechanism for us.” She says NEST also finds CDP’s water and forestry reporting to be of growing importance though argues they need a larger and more robust dataset in order to fully feed into vehicles such as the Climate Aware Fund.