UK pension pool Brunel Pension Partnership has warned managers that they face losing mandates if they are not up to scratch on climate change, describing the finance sector as “not fit for purpose” on the issue.
Mark Mansley, Chief Investment Officer at Brunel, told RI that asset managers not making sufficient progress on addressing climate risks over the next few year will face “some very hard conversations”.
The announcement comes today as Brunel, one of the eight recently formed local government pension scheme pools, unveils its new five-point climate policy.
Managers currently on the roster at Brunel include the likes of the recently appointed Wellington and Investec. It hired Legal & General Investment Management in 2018 for a passive equities mandate.
"If you are a director of a large company and you are not thinking about climate risk strategically and seriously, then I do question whether you are fit to be a director of that company" – Mark Mansley
It aims to wield the pool’s £30bn (€35.6bn) influence toward building “a financial system which is fit for a carbon-zero future”.
The policy is built on the insights Brunel has gained from engaging 130 asset managers and reviewing 530 investment strategies from a “climate perspective” on behalf of its 10 local government schemes clients.
Another ‘practical implication’ of the policy is that investee companies that also “fail to show progress” in aligning their businesses with Paris benchmarks face the threat of votes against chairs and board members.
Mansley told RI that “if you are a director of a large company and you are not thinking about climate risk strategically and seriously, then I do question whether you are fit to be a director of that company”.
Brunel will structure its engagement using the Transition Pathway Initiative (TPI) framework, asking its holdings to advance one level on the TPI management quality staircase each year, “with the aspiration of all material holdings being on TPI Level 4 by 2022”.
This year Brunel co-filed the landmark climate change resolution at Barclays calling on the UK bank to set targets for winding down its financing of fossil fuel firms not aligned with the Paris climate goals.
Mansley told RI that Brunel may prioritise the financial sector in its engagement going forward.
The new policy is launched as one of Brunel’s clients, Wiltshire Pension Fund announced it has moved £500m of its assets into Brunel’s low carbon passive equities portfolio. The southwestern county is also working with Brunel to carry out a “carbon footprint analysis of its portfolios”.
Brunel currently conducts carbon footprints of its listed equity portfolios and allocates 35% of client infrastructure portfolio investments to renewable energy funds.
The pool is currently working on developing climate based stress tests for its portfolios and intends to encourage managers to follow its lead on an area that Mansley concedes is both “difficult and complicated”.
Brunel is also working with the Institutional Investors Group on Climate Change’s (IIGCC) Paris Aligned Investment Initiative to get an understanding of Brunel’s current trajectory in relation to the Paris climate agreement.
Brunel’s five-part policy commits it to:
Policy – Brunel will encourage policymakers to adopt policies such as a meaningful price on carbon and removal of fossil fuel subsidies.
Products – Brunel will identify product areas where there is client demand for more innovative products, and invest in their development.
Portfolios – Brunel will stress-test its portfolios under a range of climate scenarios. It will challenge its investment managers to demonstrate reduced exposure to climate risk and effective corporate engagement that puts companies on a trajectory to align with a 2°C future. Managers that fail to do so will be replaced.
Positive Impact – Brunel will report on the proportion of its portfolios invested in the low-carbon transition and on how its portfolios align with the goals of the Paris Agreement.
Persuasion – Brunel will engage with its material holdings to persuade them to improve their climate management quality.
Brunel will spend the next year working with clients on the criteria to vote against board members, exclude companies or remove mandates.