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RI Comment: Why the new HSBC/Legal & General/FTSE climate push feels different

Implicit government backing in green finance push

This feels different.

Three of the UK’s leading financial institutions are now demonstrating how they now fully ‘get’ the risks of climate change and are not only prepared to allocate substantial assets to it but also engage with companies on the issue.

On top of that, the country’s Finance Minister is also on board, promoting the UK’s status as a green finance hub – and by implication backing investor action on climate change.

That’s the clear inference to be drawn from yesterday’s announcement that HSBC’s UK pension fund is to be the first to adopt a new “multi-factor” fund from Legal & General Investment Management addressing climate change risk.

The Future World Fund is a global equities index fund that incorporates a climate ‘tilt’ to address the investment risks of climate change. And the HSBC Bank UK Pension Scheme, one of the largest corporate pension funds in the UK, has selected the fund for its equity default option, worth £1.85bn (€2.1bn) of its defined contribution (DC) scheme.

Importantly, LGIM’s parent, listed insurance giant Legal & General will also be investing its own capital in the fund. That’s skin in the game.

It is worth noting that the new offering is not a segregated product – it will be available to other investors.

In a rare comment on what essentially was a product launch, Chancellor Philip Hammond said: “Three of Britain’s biggest companies have come together for the launch of this ground-breaking new fund, which is a testament to our status as the world’s leading financial centre.

“Our ability to continually innovate means we are well positioned to benefit from the opportunities a growing green finance industry presents.”

LGIM and FTSE first worked on a similar initiative back in 2011, creating a UK Equity Carbon Optimised Index Fund using Trucost data into which the British Telecom Pension Scheme put £100m. Developments over the intervening five years show how thinking has developed.

This was followed by Swedish state buffer fund Fjärde AP-fonden (AP4) and the FRR French reserve fund backing low carbon funds from Amundi based on MSCI low-carbon indices.

But the latest development comes in the wake of COP21 and Bank of England Governor Mark Carney’s taking up the issue and driving the formation of the Financial Stability Board’s climate disclosure task force: there’s more fertile ground for such a launch.

While the DC scheme has opted for the LGIM option, HSBC pension CIO Mark Thompson said the defined benefit (DB) fund had yet to decide whether to allocate to the new fund – though he noted that the 13 trustees are the same for both DC and DB funds.

The HSBC trustees are chaired by Tony Ashford, who also chairs the Unilever UK Pension Fund, while the HSBC Bank Pension Trust (UK) is run on a day-to-day basis by CEO Elizabeth Renshaw-Ames – a former Senior Partner at consulting firm Mercer.

Among the company-nominated trustees are in-house actuary Clare Beale and Francis Sullivan, the former WWF activist who is the bank’s Deputy Head of Group Corporate Sustainability. The scheme has a permanent ESG trustees steering group.

The scheme’s SIP (Statement of Investment Principles) states that the trustees expect its fund managers to “take steps to ensure” that ESG factors are “implicitly incorporated” into investment decision-making across all asset classes; ESG factors are also included in the selection of new asset managers.“This principle is applied to both Defined Benefit and Defined Contribution assets,” the SIP states. The scheme adopted climate change policy within a rigorous fiduciary framework in June 2015.

The scheme is writing to all its DC beneficiaries today (November 8) notifying them of the change to the default fund. Members will have the option to switch out and it will be interesting to see if any do. As LGIM CEO Mark Zinkula said: “Pension fund trustees need to ensure they are able to offer better risk-adjusted returns while helping to manage climate change risk.”

HSBC’s leadership in climate change goes back to the days when Nick Robins was its Head of climate change centre of excellence. He’s now Co-Director, Inquiry into the Design of a Sustainable Financial System at UNEP but Zoe Knight has very much picked up his baton as Head of Global Climate Research – backed by Global Head of Research David May.

On top of that, HSBC’s UK CEO Antonio Simoes is clearly plugged in to green finance; earlier this year he called for “policy support” to boost the corporate green bond market. One gets the impression there is a strong sponsor covenant around this.

It’s worth noting perhaps that scheme CIO Thompson has a ‘mainstream’ (that word again) background, having held senior roles at Prudential Assurance/M&G Investments.

For LGIM, the context is that it is more visible than ever on ESG issues. It has been at the forefront of investor pressure on Sports Direct and has taken a lead on the Investor Forum, for example. LGIM, the largest manager of UK DB pension assets, has a total of £853bn in assets under management for around 3,000 institutional clients.

A key feature of the new product is that LGIM will use its total AUM muscle to vote against the chairs of all companies that respond poorly.

LGIM has identified the largest companies in six key sectors (oil and gas, mining, utilities, automobiles, financials, food) that it believes are pivotal to shift the market to a low carbon economy. The new fund will divest from companies that fail to meet LGIM’s minimum criteria after an engagement period, saying it’s a “powerful tool” to raise better corporate standards across the market. In says it is “stepping up its responsibility to help build a low carbon future to protect clients’ assets”.

In its own words, LGIM is now “getting tough” on engagement. Hammond’s presence appears to be an implicit endorsement of this approach, especially in the light of Prime Minister Theresa May’s plans to raise the governance game by putting workers on boards etc.

The other partner of this new climate triumvirate is index firm FTSE, whose All-World ex CW Climate Balanced Factor Index is the basis for the new fund. Under MD Kevin Bourne, FTSE Russell has developed what it calls its Green Revenues (LCE) data model which measures the exposure of over 13,000 listed firms involved in the green transition.

FTSE wants companies be more transparent on revenue sources so investors can determine green revenue lines and low carbon revenue lines – and LGIM will engage on this topic.

In September, RI ran an article (Passive attack) looking at the rise of large passive investors promoting governance change. Now LGIM, HSBC and FTSE have managed to put the focus squarely on climate change now too and companies would be very well advised to take note.