Vermont treasurer wants to work with other investors on low-carbon passive vehicle

$4bn fund’s options assessed by consultants PCA

Vermont’s State Treasurer wants to work with other “like-minded” investors to create a low-carbon passive investment vehicle to help it decarbonise its investments at low cost and in alignment with its broader ESG policy.
In a letter to the state’s ESG Sub-committee, Beth Pearce lays out a number of proposals to help reduce climate-related and ESG risks for its $4bn pension fund. The letter will be discussed at a meeting on Thursday, following a long-running assessment of the fund’s ESG options by consultants Pension Consulting Alliance (PCA).
The findings of the assessment, which focused on whether Vermont should divest from fossil fuels, were published last week. The debate has been prompted by the state’s former Governor, Peter Shumlin, who last year urged the pension fund to pull out of oil and coal.

“We should take this opportunity to explore opportunities to move to a low-carbon economy”

At the time, Pearce responded by saying that she was also concerned about climate risk, but did not believe divestment was the appropriate way of dealing with those risks.
The report from PCA echoes these views, saying that some “portfolio-wide, potentially material financial risks and opportunities posed by climate change are not addressed by fossil-fuel divestment”. The reports also looks specifically at the potential for divestment from ExxonMobil, concluding that this would require funds to be managed in separate accounts rather than pooled funds, raising the costs associated with running the money.

“The report supports previous studies by [investment consultant] NEPC LLC and Treasury staff, stating that divestment would increase costs and add diversification and technological risk to the portfolio,” said Pearce in the letter to subcommittee members.“I believe we should take this opportunity to explore opportunities to move to a low-carbon economy consistent with our fiduciary responsibility,” she continued, before listing five possible recommendations:

1. The inclusion of ESG considerations when selecting asset managers. This would mean an update to internal policy to require the state to assess the ESG practices and policies of potential asset managers.
2. The exploration of the “possibility of working with other institutional investors together in a collaborative effort” to develop “a new passive investment vehicle that could be seeded by Vermont and would be consistent with our ESG policy”. “This may provide an opportunitiy to bring like-minded institutional investors together to identify potential low cost, passive investment vehicles and low-carbon opportunities, consistent with existing manager selection process.”
3. Working with NEPC “to explore ways to identify renewable energy opportunities as incorporated in asset classes or as a subset of asset classes”.
4. Looking at the potential for creating reporting tools on ESG factors.
5. Engaging further with asset managers to climate change and ESG, and preparing regular updates from Treasury staff.

If the proposal is accepted, Vermont would not be the first asset owner to drive the development of low-carbon indexes and funds. In 2014, Swedish pension fund AP4 and France’s Fonds de Réserve pour les Retraites got behind the creation on MSCI’s Low Carbon Leaders Index, helping to develop the methodology and then committing billions of euros to it. Last year, HSBC’s UK pension fund helped to create an index and fund with FTSE and Legal & General that assessed carbon exposure and green revenues.