Environment Agency fund revamps investment strategy to limit climate change impact

Leading responsible investor eyes new asset classes

The Environment Agency Pension Fund is developing a new investment strategy to help boost its commitment as a long-term responsible investor and limit its vulnerability to climate change.

The overhaul will see the £1.9bn (€2.4bn) fund go into infrastructure, farmland and forestry for the first time.

As part of the revamp, the fund is currently looking to appoint a new low volatility global equity manager(s), worth up to £165m, new emerging market fund manager(s) (£65m) and new unconstrained global bond pooled fund manager(s) (£100m). The new managers will have to take account of environmental, social and governance (ESG) factors, the fund says.

The fund plans to cut equity risk, continue its focus on ESG analysis and sustainably themed equities, and diversify into the new asset classes as positive ways to reduce its climate change risks.

“We regard this move as the next step in our financially and environmentally responsible investment strategy,” Pearce said.

“We have decided to reduce our exposure to public equity risk, seek more fixed income, and make strategic long term investments to ‘climate friendly’ sustainable ‘real assets’.”
It will target 5% of its assets into sustainable property and 3.5% to farmland/forestry and 3.5% to infrastructure.

It will also consider allocations of £10m-£20m to “opportunity” fixed income investments that might include climate/sustainable bond funds.

The strategy, which replaces the current investment strategy that was established in 2005, will help the fund in its aim to be 25% invested in the “green economy” by2015. It currently has nearly £250m, or 13% of its total portfolio, invested in clean technology.

The fund has undertaken a climate change analysis of the new strategy based on its current and potential future asset mix.

“The next step in our financially and environmentally responsible investment strategy”

The fund says it has a fiduciary duty to take account of material environmental risks and opportunities that could affect investment returns.

In real estate, the fund is interested in energy efficient low carbon buildings. As for farmland, it is interested in ventures with good environmental stewardship of land, soil and water resources. For timberland, it’s interested in sustainable forestry that encourages greater biodiversity and provides environmental services. Infrastructure may include “a range of renewables and public transport systems”.

The new allocations will most likely be invested via managed funds or possibly in collaboration with other pension funds.

The implementation of the new strategy is now underway, with fund manager searches on low volatility global equities and emerging market equities. Other new mandates on corporate bonds and real assets will follow.

No changes are expected to the fund’s existing 10 asset managers. They include Legal & General Investment Management, Standard Life Investments, Sarasin & Partners, Generation IM, Impax Asset Management, Comgest AM, Robeco, Royal London, Aviva Investors and Informed Portfolio Management.