Pension power: beyond net zero

Rachel Elwell, CEO of Border to Coast Pensions Partnership, talks to Mike Thatcher about engagement versus divestment, the race to net zero and how progress on sustainability will be measured.

Local government is under increasing pressure to address sustainability issues – for councils themselves, their suppliers and their pension funds. There is a race to net zero across the sector, but sustainability means more than this – it requires profound change and not always taking the easy option.

This more considered approach has been adopted by the Border to Coast Pensions Partnership led by chief executive Rachel Elwell. Border to Coast has announced a net-zero target of 2050, but it has also advocated a policy of engagement with polluting companies.

Elwell’s is a powerful voice given that Border to Coast is one of the UK’s largest public sector pension pools, with funds totalling £55.7bn across 11 local government funds. She became chief exec in 2017 and has more than 20 years’ experience working in pensions and institutional investment.

In the latest Room151 Q&A, Elwell discusses the pool’s philosophy, explaining that divesting can improve an individual portfolio carbon footprint, but it does nothing to slow the pace of global warming. Conversely, engagement can be a more powerful way to effect change.

She also describes how Border to Coast will set out a roadmap in the autumn that will outline the investments that will be managed in line with net zero, interim targets for 2030, and how progress will be measured.

MT: Why did you choose 2050 as your target date to reach net zero?

RE: While I believe that we all hope the world will be net zero before 2050, our target date has been chosen to align with the global consensus determined in the International Paris Agreement. The timeline may seem long, but it recognises the scale of the work and investment required to achieve real world results. We cannot end the world’s continued reliance on fossil fuels overnight, it will take time and money – indeed the International Energy Agency has stated that the energy sector alone requires $4 trillion of investment to be net zero by 2050. So, while we do need to act urgently, we must also ensure our actions have a real and positive impact on climate change and work to deliver a just transition.

MT: What are the first steps you need to take to reach your goal?

RE: Prior to our formal commitment to net zero, we had already undertaken work that would ultimately support the goal, for example, with our private market investments into renewable energy projects, and our engagement with companies to reduce their carbon intensity.

We are now working to formalise our plans and as part of this we are developing a roadmap on how we intend to achieve it, which will be published in autumn 2022. This roadmap will outline the investments that will be managed in line with net zero, our interim targets for 2030, and how we will set targets and measure our progress.

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MT: How do you manage the fact that one of the funds in your pool has adopted an earlier deadline?

RE: While different funds have set different deadlines when it comes to net zero specifically, we are all still working towards the same common goals: lowering greenhouse gas emissions, supporting climate change solutions, and building a more sustainable future. While an earlier net zero date may impact a fund’s overall strategic asset allocation, our role remains the same. We continue to offer the investment opportunities and support our partner funds need to secure sustainable investment outcomes and pay the pensions of their members.

MT: What are the main challenges that you envisage in reaching the target?

RE: The first challenge is the availability and quality of data. While many sectors have clear and robust reporting on their carbon footprint, this isn’t consistent across all sectors and indeed across asset classes. We need wide consensus on metrics and methodologies to ensure investors can make effective decisions in line with their net-zero goals, to measure progress, and ultimately to hold to account the companies in which we invest.

Managing the risks of unintended consequences is another challenge. It is sometimes assumed that withdrawing capital from companies will force change. However, this argument overlooks the fundamental fact that, while divesting can make an individual portfolio carbon footprint look good, it doesn’t tackle real levels of greenhouse gas emissions. Divestment has significant unintended consequences, an important one of which is letting carbon-intensive companies off the hook in the absence of responsible shareholders who are able to push them to make improvements and lessen their harmful impact on the world.

Another unintended consequence is that our understanding of which companies will deliver through a just transition is imperfectly understood, particularly with respect to their impact on emissions right across their production and distribution process. As long-term investors, we need to ensure we recognise the long-term risks to returns for our partner funds.

While divesting can make an individual portfolio carbon footprint look good, it doesn’t tackle real levels of greenhouse gas emissions. Divestment has significant unintended consequences.

MT: How closely do you work with the other pools on net zero initiatives?

RE: We collaborate widely across the LGPS and engage on climate-related issues with companies and other bodies through membership of the Local Authority Pension Fund Forum. We also support other collaborations such as Climate Action 100+ and the net zero asset manager and asset owner initiatives.

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MT: What metrics are you using to determine your carbon emissions?

RE: The metrics we decide to use for our journey to net zero will be part of our roadmap, which will be published later this year.

MT: How will you disclose your progress?

RE: Our roadmap will outline how we intend to achieve net zero and we will set interim targets for 2030, which will be reviewed and updated at least every five years. Our annual TCFD (Task Force on Climate-Related Financial Disclosures) reporting will provide insights on how we are progressing along our roadmap and against our targets.

It would be easy to dismiss carbon-intensive companies as high-risk, too damaging to the environment, and divest. However, doing so risks oversimplifying what is a more nuanced and complicated matter.

MT: Do you agree with those who have suggested that the best way to address climate change is through divestment rather than engagement?

RE: Divesting from sectors can appear attractive on the surface, and it will reduce the carbon footprint of investment portfolios. However, as discussed in the earlier question, it limits an investor’s ability to act and to hold companies to account, meaning that ultimately divestment doesn’t change what’s happening in the real world, or remove the underlying threat that climate change poses to all of us. Of course, that doesn’t mean that we hold such companies indefinitely: divestment from companies where we don’t believe there is a credible transition plan is an important part of the engagement toolkit.

A prime example of the unintended consequences from divestment took place when Anglo American spun off its thermal coal business as Thungela Resources. Investors in Anglo American saw a rapid improvement in portfolio emissions. However, Thungela continues to operate as a standalone coal business and the CEO has said he is looking to grow rather than shrink coal production. What may look good for your investment portfolio does not mean it is good for the climate. It simply shifts the problem elsewhere. Nor does it reduce the systemic risk posed to your wider portfolio by climate change.

Actively engaging with all companies is critical to an effective transition – and this is more important in sectors that currently have a high carbon footprint. It would be easy to dismiss carbon-intensive companies as high-risk, too damaging to the environment, and divest. However, doing so risks oversimplifying what is a more nuanced and complicated matter.

Take Holcim, a manufacturer of building materials and cement, which is a is a highly carbon-intensive process. A blanket divestment policy would mean we could not support the company’s work to create lower-carbon building materials and lead the way on carbon capture storage projects, supporting crucial work in the energy transition.

Carbon intensive sectors need significant investment if they are to stop being part of the problem and become part of the solution. As a responsible investor, we need to consider how we can drive effective change in the sectors that have the biggest impact on climate change – and can deliver the just green transition we all need.

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