Will divest from companies, remove managers who don’t fall in line

Brunel Pension Partnership, a UK pension fund manager with assets of 30 billion pounds, has established a new climate policy, aimed at challenging investment managers and businesses to act on addressing climate change.

The new policy will affect both issuers and investment managers. Between now and 2022, Brunel will demand that issuers that are “material holdings” of the fund take steps to align with the benchmarks set by the Paris Agreement to limit global warming. Failure to meet these demands will result in votes against the reappointment of board members, or divestment from Brunel’s portfolios.

Similarly, investment managers must demonstrate reduced exposure to climate risks, or risk having their mandates removed.

Asset managers “not fit” on climate

Brunel has taken a deep dive into its current investments for climate impact, engaging 130 asset managers and reviewing 530 investment strategies, and has concluded that the asset management industry is “not fit for purpose” in addressing climate risk.

Addressing the investment management sector’s unsatisfactory response to date on climate risk, Brunel’s Chief Investment Officer, Mark Mansley commented,

“Climate change is a rapidly escalating investment issue. We found that the finance sector is part of the problem, when it could and should be part of the solution for addressing climate change. How the sector prices assets, manages risk, and benchmarks performance all need to be challenged.”

Clients demanding action

In Brunel’s statement, the pension manager states that addressing climate risk is a key client demand that the investment industry has yet to meet. According to Chief Executive Officer Laura Chappell,

“Our clients have high ambitions on climate change, but the finance sector does not currently offer a sufficient range or quality of climate-aware products and expertise across all asset classes to meet their needs. We want to enable our clients to integrate climate change mitigation and adaptation across their investment strategies in a substantive way.”

The statement went even further, outlining key failings of the investment industry:

  • “An emphasis on short-term rather than long-term performance, which drives short-term thinking by investors and companies
  • An unwillingness by asset managers to invest in the low carbon economy, especially in areas which depend on public support or where technologies are perceived to be unproven
  • Backward-looking investment risk models that are inherently flawed at taking future climate risk into account
  • Instances of perverse incentives and conflicts of interest throughout the system – not least, the use of conventional market-weighted benchmarks to measure performance, when climate risk is not adequately priced by the market

Five-point plan

Brunel’s new climate policy is built around a five-point plan:

  • Policy – Brunel will encourage policymakers to adopt policies such as a meaningful price on carbon and removal of fossil fuel subsidies.
  • Products – Brunel will identify product areas where there is client demand for more innovative products, and invest in their development.
  • Portfolios – Brunel will stress-test its portfolios under a range of climate scenarios. It will challenge its investment managers to demonstrate reduced exposure to climate risk and effective corporate engagement that puts companies on a trajectory to align with a 2°C future. Managers that fail to do so will be replaced.
  • Positive Impact – Brunel will report on the proportion of its portfolios invested in the low-carbon transition and on how its portfolios align with the goals of the Paris Agreement.
  • Persuasion – Brunel will engage with its material holdings to persuade them to improve their climate management quality, using the Transition Pathway Initiative assessment framework. It will ask its material holdings to advance at least one level on the TPI management quality staircase each year, with the aspiration of all material holdings being on TPI Level 4 by 2022.  In cases where companies fail to show progress, Brunel will vote against the reappointment of the Chair and other board members.

ESG Today highlights and takeaways:

  • Ready or not, ESG is going mainstream. While already a more established investment theme in Europe than in the U.S., ESG investing will become mainstream everywhere. Brunel is a member of Climate Action 100+, a group that got a major boost this month when investment behemoth BlackRock joined. Expect similar actions to Brunel’s in the U.S. over time.
  • Client demand will be a key driver of ESG investing. Whether or not investment managers are interested in ESG, they are under increasing client pressure to follow sustainability principles in their portfolio allocations. This will continue to drive ESG investment themes.