The journey to net zero

Our ambition is for our investments to become Net Zero for greenhouse gases, not just carbon. We measure the carbon dioxide equivalent (CO2e), where available, to compare the emissions from various greenhouse gases on the basis of their global-warming potential.

While there are some who believe that divestment, particularly of fossil fuel companies, is the only answer to achieving Net Zero, we strongly believe that engagement is the most effective way of driving positive change. And there is an increasing body of academic research that supports this position. The critical thing is that we need the world to transition to a lower carbon future, rather than just divest our portfolio.

We use a variety of engagement methods, including meeting individually with the company or entity, collaboratively engaging alongside other investors, co-filing, or submitting shareholder resolutions or proposals, publicly engaging the entity, voting, and divesting or implementing an exit strategy. The specific strategies we use, and the sequence in which we use them, depend on the issues in question, the mechanisms of influence available to us, and the characteristics of the investment made. You can find more about our approach to engagement and relevant case studies in our Stewardship Code Report 2022.

On voting, we use our voting power at company AGMs to support climate change resolutions. While we support most climate related resolutions, we are discerning and will only support those which make sense for us as a long term investor with a primary duty to invest in the best interests of our members. We carefully consider each resolution on its merits before voting and often engage with other investors during this process. In the first half of 2022 (a year with more climate resolutions than before), we supported 74% of shareholder resolutions and 77% of company resolutions specifically on climate change. For high emitting companies that we invest in, we accompany our vote with an engagement letter setting out our expectations (for example, the inclusion of scope 3 metrics). However, in some cases it is important for us to show support for companies, so that we can use engagement as a way of driving positive change, further innovation, and development around climate change.

This would follow a detailed review of the long-term financial factors associated with investing in certain sectors. In the case of our divestment from tobacco manufacturing, thermal coal mining and more, our detailed review found that traditional financial models widely used by the whole of the market to predict the future performance in these sectors, had not considered specific risks such as political and regulatory attitudes, which we think would damage the financial prospects of businesses involved in these sectors in the years to come.

A move away from fossil fuels must be a transition not a cliff edge: recognising that fossil fuels have a role to play in the near term to keep the lights on, but for most sectors fossil fuels won’t be there in the long term. As a long-term investor with a primary duty to invest in the best financial interests of our members, we therefore must try and encourage the assets and markets in which we invest to make this transition.

Last year, we reported Scope 1 and 2 emissions data. In this year’s TCFD report, we have included an estimate of our Scope 3 emissions. While we have been able to obtain estimates for a large proportion of our universe, the availability and reliability of Scope 3 data remains poor. We were only able to obtain Scope 3 data for approximately £23bn of our £46.4bn non-sovereign assets.

Investment decisions are based on a number of different data points, and we use our investment experience and expertise to determine how much weight to give all the information we have. Climate risk is an increasingly important financial factor in our investment decisions, but its only one of many financial factors that influence our decisions. Our primary fiduciary duty is to invest in the best financial interests of our members – that is therefore a key part of our decision-making process and why we take carbon emissions and climate change into account.

We believe divestment risks being seen as greenwashing because, while it’s possible to divest from some carbon-exposed assets, it would make no difference to the actual carbon emitted to the atmosphere and therefore won’t address the climate challenge and its financial risk. If we were to simply sell a high carbon asset, another investor without an agenda to address climate risk may buy it, reducing the incentive for that company to transition.

Instead, we strongly believe engagement is the most effective way of driving positive change, which will lead to better financial outcomes. We can drive this positive change by:

• Actively engaging with the management teams of the companies in which we invest, encouraging them to change, and being willing to finance that change.
• Backing businesses that act as catalysts for change (either through their products or the services that they offer), as well as those businesses that will replace high-carbon competitors.
• Proactively engaging with policy makers to create sustainable and climate finance related policy.

If it becomes clear that a particular sector or company cannot transition to Net Zero, we’ll use divestment as a tool if necessary. We have divested from, or will not invest in, several sectors, such as companies that mine for thermal coal where this activity made up more than 25% of a company’s revenue. We did this because of our belief that this sector cannot make the transition to Net Zero and therefore is a financial risk. But where a sector, or company, can evidence that it can make the transition, and is committed to doing so, we will support it.

We agree that we must do more to achieve our interim targets, and to support the global transition to net zero, but this will be a journey – one that we’re addressing with great seriousness and commitment. The steps we’ve made so far are our first steps on the long journey ahead of us. They won’t be the only steps. We are wholeheartedly committed to delivering against our net zero ambition and we are working hard in the background to progress against our targets.

We set a target of 2050 because it aligns with the Paris Agreement, which was signed in 2015 and legally binds its signatories to limiting global warming to well below 2° and preferably to 1.5°. It also aligns with the UK government’s net zero ambitions. Given that we invest in UK government debt, it would be impossible to be net zero before the UK is. However, our ambition is for our investments to be net zero by 2050, if not before, so we are doing all we can now to ensure we’re meeting the right targets.

This is the wording associated with the Paris Agreement, which legally binds its signatories to limiting global warming to well below 2° and preferably to 1.5°. We’re therefore working to keep to 1.5°, but the wording itself aligns to the Paris Agreement.

We strongly believe in engagement with policy makers, as they set the framework in which the companies we invest in operate. Our engagement with policy makers is evidenced in a recent report by InfluenceMap on European pension funds engaging with sustainable finance policy. It found that USS is one of only four of the 25 funds assessed that have shown meaningful engagement with sustainable finance policy, illustrating that many funds do not appear to be engaging proactively on emerging efforts in this area.

We recently signed the 2022 Global Investor Statement to Governments on the Climate Crisis. This, with hundreds of investors around the world, calls on governments globally to raise their climate ambition ahead of and beyond COP27. We also recently responded to BEIS’s independent review of the UK’s Net Zero goals. This was an opportunity to showcase our Net Zero ambition with Government, and to highlight how stimulating investment into sustainable assets can drive both economic growth and progress towards the country’s Net Zero goals.

To strengthen our voice, we also engage on these matters alongside other investors through collaborations like the Institutional Investors Group on Climate Change (IIGCC). Our involvement in the IIGCC Policy Working Group supports engagement with policy makers in the UK, EU and member states on improving climate change regulation. You can find more information in our 2022 Stewardship Code Report.

The ethical funds available in the Investment Builder apply specific criteria that is driven by ethical concerns rather than financial concerns. Our primary duty is to invest in the best financial interests of our members. So, we can only take non-financial, or ethical, factors into account where they don’t pose a financial risk to USS and where we believe our members share the same views. Where members wish to express an ethical preference with their Investment Builder savings, they can do so by choosing one of our ethical options.