Brunel Pension Partnership: Financial Services Sector Not Capable Of Addressing Climate Change

In an ambitious new climate policy, £30 billion British pension fund, Brunel Pension Partnership, one of the eight pooled Local Government Pension Scheme funds across the UK, has called for a financial system, which is more climate aware. The entity aims to remove groups and investment managers who do not comply with the policy of addressing the climate change in ambitious new climate policy.

The British Pension Partnership has set out a ground-breaking new approach to capture and address climate-related financial risk. Brunel Pension fund aims to challenge the asset manager industry for addressing climate change. According to the Brunel’s new policy, a financial system is to be devised on a five-point plan basis and insights collected in the course of procuring new asset managers for its clients over a period by which it will ensure zero carbon emissions. From a climate perspective, the British pension fund analysed 530 investment strategies and 130 asset managers.

Dealing with climate change is much more than a mere investment issue. The group identified that the finance sector is a major contributor to the problem; therefore, the financial services sector should contribute more in finding solutions for addressing climate change. The solutions might change the way assets are priced today, risk management and other important metrics. In the near term, that is till 2022, Brunel Pension fund will try to match emission standards with Paris benchmarks (Paris climate summit) to improve upon their climate management quality.

The Bristol-based pension fund shall cast its vote against the reappointment of board members of companies that fail to do so and could be removed from Brunel’s portfolios after 2022. Furthermore, Brunel aims to reduce exposure to climate risk by challenging their investment managers and deploying effective corporate engagement that puts companies and portfolios on a trajectory to align with a 2°C economy.

Brunel noted that its clients are highly ambitious on climate change, but as of now the financial services sector does not offer any expertise across the asset classes, neither does it have enough range or quality of climate-aware products to meet their goals. The Bristol based fund hopes to empower its clients to accept this transition to integrate climate change mitigation and adapt to investment strategies in a substantial way. This transition should be implemented in a systematic manner to keep the rise in temperature to well below 2°C. The climate emergency is right in front of us, and the company as a part of the industry is taking all possible initiative.

However, as identified by Brunel, there are a few challenges within the finance industry. Most of the investors and companies lay importance on analysing performances in the short term rather than having a longer time horizon, which drives short-term thinking. Another challenge is that the asset managers are not sure of investing in projects which are backed by public support or where technologies are still not proven or stabilised, and basically are unwilling to invest in the low carbon economy. Investment risk models that can backtrack or are regressive that is not capable of capturing future climatic risk. In addition, conflicts of interest arising throughout the system and instances of perverse incentives do not let climatic risk adequately priced by the market as they use the conventional market-weighted benchmarks to measure performances.

The Bristol based fund allocates 35 per cent of client infrastructure portfolio investments to renewable energy funds and has already conducted carbon footprints of its listed equity portfolios.

Building on these bold steps, its new policy is implemented with the help of five-point plan to build a financial system which is fit for a carbon-zero future. The first point is Policy, according to Brunel, policymakers should consider the removal of subsidies on fossil fuel and price them in a meaningful way. Secondly, Products, demand more investment to bring out innovative solutions to drive growth and convince investors. Then comes the Portfolios, which shall undergo stress-test by Brunel under a range of climate scenarios. The asset managers of the company will be tested by the challenges to reduce the exposure to climatic risk and failing to do so will lead to their separation. The fourth point is the Positive Impact; the assessment will be done by Brunel of its portfolios that invested in low-carbon assets and aligning its goals with the Paris Climate Summit agreement. The fifth point, Persuasion, Brunel by deploying the TPI (Transition Pathway Initiative) assessment framework, will persuade its material holdings to improve their climate management quality. These material holdings are expected to show improvement year on year to Level 4 (TPI) by 2022. The Bristol based fund shall vote against the reappointment of the Chair and other board members in cases where the companies do not comply with this transition.

This five-point policy was developed by Brunel in an exhaustive consultation process in the local government finance sector with its clients and other stakeholders. These clients showed great support. Recently, Wiltshire Pension Fund has invested 20 per cent of their assets into the Low Carbon Passive Equity portfolio of Brunel Pension Partnership.

One of the prestigious clients of Brunel stated that this ground-breaking policy would enable them to protect their beneficiaries pensions well into the future and demonstrates the need of partnership in the financial services sector that will be required to respond effectively to the financial risks posed by climate change. The time is now for everyone in the industry to step up and show leadership in this hour of emergency, and the investors should ensure that the assets entrusted to their beneficiaries are resilient to climate risks. Some big investors are now reassessing their climate policies.

 About Brunel Pension Partnership Limited

Brunel Pension Partnership Limited (Brunel) has a pool of investments worth £30 billion of many strategically aligned Local Government Pension Scheme funds. Brunel believes in making sustainable investments for a world worth living in with a longer time horizon. The investment made by Brunel is diversified in 130 plus investment managers who manage trillions in assets.