Rob Lake: A tale of two pension funds: the fascinating evolutionary path of responsible investment

How announcements by ABP and the Environment Agency put them at the forefront

The last few weeks have seen two important and fascinating announcements by two pension funds that are both – each in its own distinctive way – leaders in responsible investment. On 14 October the €356bn Dutch civil service and education pension fund ABP launched an overhaul of its responsible investment policy that had been a year in the making. (Disclosure: I used to work for ABP.) Then a few days later the UK’s Environment Agency Pension Fund (EAPF) announced a new Policy to Address the Impacts of Climate Change.
The two policies have much in common. Both involve commitments to reduce carbon emissions, increase investment in low-carbon energy and other clean technologies, engage with companies and policymakers to encourage a low-carbon transition and divest from companies that are judged not to be making enough progress in this direction.
But what is particularly fascinating is the different ways these two funds explain the rationale for their new approach. The Environment Agency, in a world first, makes an explicit pledge to ‘ensure that our Fund’s investment portfolio and processes are compatible with keeping the global average temperature increase below 2°C relative to pre-industrial levels, in-line with international government agreements’. This is a truly ground-breaking approach. It is set firmly in the context of beliefs that climate change is a systemic risk to the economy and a material financial risk for the fund, and that addressing climate change is a legal duty given the overarching objective of acting in members’ best long-term financial interests. The question it addresses is ‘what do we need to do to achieve our financial objectives given our views on climate change?’.
This leads EAPF to set bold targets of increasing low-carbon investments to 15% of the fund by 2020 and investments in clean and sustainable companies to 25%, and cutting exposure to ‘future emissions’ from coal by 90% and from oil and gas by 50% by the same date.
ABP is equally strongly focused on members’ financial interests.But as the full policy paper approved by its board (in Dutch) makes clear, the fund feels an acute need to respond to its members’ rising expectations in relation to environmental and social issues, and a responsibility – born in no small measure of its size and global reach – to help ensure that companies and governments in which it invests capital use that capital responsibly. The primary question ABP is addressing is ‘How can we satisfy our members’ environmental and social expectations and demonstrate that we are a responsible institution (while also meeting our liabilities)?’.

ABP plans to meet this challenge by cutting the carbon footprint of its equity portfolio by at least 25% by 2020; investing €5bn in renewables; shifting equity and corporate credit investments steadily towards companies with above-average ESG performance, which it expects to cut the number of its equity holdings by 1,500; stepping up company engagement to encourage ESG improvements; and targeting new thematic investment in areas of particular relevance to its members, including economic infrastructure (for government employees), education (for teachers and education workers) and safety (for emergency services workers).
The purpose of this blog is not to say that ABP’s approach is ‘better’ than EAPF’s or vice-versa. That would be to compare sheep with goats. Each of these approaches is in its way at the very forefront of responsible investment worldwide (alongside other notable leaders I’ve highlighted elsewhere – for example here). The purpose is simply to highlight the diversity of responsible investment around the world. The interaction of megatrends such as climate change, natural resource depletion and globalisation; societal values and expectations; and each asset owner’s financial circumstances, heritage and organisational culture is generating multiple strategies and interpretations. Just as there is no single, universally ‘correct’ way to invest, there is no single, universally ‘correct’ way to be a responsible investor. May a thousand flowers bloom.

*Rob Lake, an independent Responsible Investment Advisor, is moderating the opening session at RI’s ESG 2.0 conference in London on Thursday 19th November, featuring panelists from ABP, MSCI and PGGM link *