Universities Superannuation Scheme Ltd – the trustee of the UK’s largest private pension scheme by way of assets – has reinforced its view of climate change as a financial risk to the returns generated by its assets by announcing its ambition to be Net Zero for carbon by 2050, if not before.
The ambition is in line with the Paris Agreement, to which the UK is a signatory, which was designed to limit global warming below 2 degrees centigrade. In order to meet this target, global climate emissions will need to meet Net Zero by the middle of this century across all sources of emissions - Scope 1, 2, and 3.
Today’s announcement is the latest development in the long-standing history USS has of recognising climate change as an investment risk. Our first work on this was completed in 2001 leading to the launch of the Institutional Investors Group on Climate change (IIGCC). Last year, USS Investment Management, the principal investment manager and advisor to USS, went a step further when it announced plans to exclude (and disinvest where necessary) from a number of sectors deemed to be financially unsuited to the scheme over the long-term, including thermal coal mining (where this makes up more than 25% of a company’s revenues). The burning of coal is responsible for 40% of carbon dioxide emissions worldwide and accounts for 70% of total greenhouse gas (GHG) emissions from the electricity sector.
USS Investment Management will now develop a comprehensive strategy in order to deliver on this Net Zero ambition while remaining mindful of its fiduciary duties. The transition, which will not rely on the Scheme buying carbon offsets, will not only require a fresh focus by its internal investment teams in terms of where and how we invest, but it will also require USS to work with peer funds, our external asset managers, and others in the investment value chain in order to deliver against this ambition.
USS Investment Management is now in the process of establishing short, medium, and long-term targets and programmes to deliver on this ambition. Likely actions will include:
- Working with our internal investment teams to ensure that we have the processes in place to select those companies and assets to own, or from which to divest, in a transitioning world
- Reviewing and possibly changing the benchmarks we use to guide and measure performance to ensure that these take carbon (and other ESG factors) into account
- Ensuring that assets that we own directly are resilient in the face of a move to a Net Zero world
- Continuing to build on the £1 billion both already invested and committed to new projects in developing a portfolio of low carbon investments such as investments in wind, solar and other sources of renewable energy
- At the same time, divesting over time from high carbon sectors which are at financial risk from the transition – as we have already done with thermal coal
- Collaborating with other asset owners and managers, to engage with and encourage company management teams to strive for material progress in this area, and also to decide what action should be taken where they do not transition fast enough.
In addition, as a universal owner, USS is exposed to the economic performance of markets globally. It is therefore critical that we engage with policy makers and advocate for clear climate policies which lead to a smooth transition. In this we will continue to partner with global organizations such as the IIGCC and other investor groups to signal to policy makers a need for concerted action.
UK Energy Minister Anne-Marie Trevelyan said: “Pension funds and their members have a critical role to play in fighting climate change and the Universities Superannuation Scheme’s new target to reach net zero by 2050, if not before, will see it take a leading role as a responsible investor. I hope USS’s step today will encourage other investment groups to follow suit in using their position to shape the green economy, provide climate security for generations to come, and play their part in helping the UK end its contribution to climate change by 2050.”
Bill Galvin, Group CEO of USS, said: “As a Trustee we must act in the best financial interests of our members and the Scheme and that requires us to consider all material risks to investment performance.* It is quite clear that ESG, and in particular, climate change, have become more important than ever in how we consider investment returns. Today’s announcement is in recognition of the seriousness with which the Trustee is treating ESG risks and also acts as a signal to the market, our assets and to policymakers that USS is willing to play its part in the important move to decarbonise by 2050.”
Simon Pilcher, CEO of USS Investment Management said: “We already invest in a broad range of assets including renewable energy as well as companies with whom we have worked closely to enable them to meet Net Zero targets themselves. Today is about taking the logical next step as responsible investors. We recognise that this transition will not be easy, but rather than the Scheme buying carbon offsets, we have work to do to establish short, medium, and long-term targets and milestones on our journey to Net Zero. We now look forward to engaging further with policymakers and our investments in order to make this ambition a reality by 2050, if not before.”
*Further detail can be found in our Investment beliefs and principles document.
1 In this context, Carbon is shorthand for Green House Gasses.
2 Those produced as a result of owned or controlled sources, indirect emissions from the generation of purchased electricity, steam, heating or cooling consumed by the reporting company and all other indirect emissions that occur in a company’s value chain.