Environment Agency Pension Fund allocates £280m to fund tracking new low-carbon MSCI Index

Move cuts UK scheme’s passive investments in fossil fuel firms by 90%

The UK’s £2.7bn (€3.7bn) Environment Agency Pension Fund (EAPF) has shifted its entire £280m (€381m) passive equity portfolio to a fund that tracks a new low-carbon index developed by MSCI, saying it wants to reduce the investment risk associated with fossil fuels. EAPF said it had directed its asset manager Legal & General Investment Management to re-allocate the portfolio from investments in standard indices like the MSCI World to a fund that tracks the new ‘MSCI World Low Carbon Target Index.’ The move reduces its exposure to fossil fuel firms by 90% compared with the conventional index funds held previously. Some exposure to fossil fuel companies remains, typically in companies where the emphasis is on gas. According to MSCI, the low-carbon exposure in the index is achieved by overweighting those companies with low carbon emissions as well as those with potentially low carbon emissions. Mark Mansley, Chief Investment Officer at the EAPF, said: “For us, climate change is an investment risk issue, so we wanted a benchmark which takes a risk-based approach, rather than simply excluding certain stocks. We felt that MSCI understood the needs of institutional investors when they developed the Low Carbon Target approach.”Mansley added that another attraction of the low-carbon index was its low tracking error. The extent to which the index deviates from the benchmark (i.e. MSCI World), is 0.3% per annum. The EAPF supports the so-called “stranded assets” argument posited by UK think-tank Carbon Tracker. This holds that a mix of future regulation of carbon emissions and renewable energy expansion could force fossil fuel firms to leave reserves unused – or ‘stranded’. For investors, such a scenario poses a serious risk, says Carbon Tracker.
Beyond what it is doing internally, EAPF said in a climate risk strategy paper last year that it would “continue to raise awareness of the potential for stranded assets developing within the fossil fuel industry and actively support other pension funds in assessing climate risk in their portfolios.”
EAPF said that it would welcome other UK pension funds joining the L&G fund tracking the low-carbon index. “The product has only just launched, but we understand that it has gained a good deal of attention among other UK schemes,” said Mansley.