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22 October 2018

The divestment debate

Earlier this month, the world’s media reported on the stark warnings contained in a report published by the Intergovernmental Panel on Climate Change (IPCC).

The BBC headline read: Final call to save the world from 'climate catastrophe'.

It was one of many headlines setting out a very clear, and very worrying, message; a message about the many risks and irreversible impacts of climate change.

This is an issue of global significance and, as a responsible investor, we have been an active participant in the climate change debate for the past two decades.

We established the Institutional Investor Group on Climate Change (IIGCC) in 2001 and were a signatory to the international investor open letter to G7 finance ministers in 2015 urging support for the inclusion of a long-term emissions reduction goal.

Most recently, the Government’s Environmental Audit Committee found USS to be one of the ‘more engaged’ of the UK’s biggest 25 pension funds on the issue of climate risk; specifically funds that are taking steps to assess and minimise their exposure to the physical and transition risks from climate change.

We have since reported on our climate change activities in line with the recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

Beyond being part of broader initiatives we also promote climate change issues in the high carbon companies in which we invest such as Royal Dutch Shell.

Yes: we invest in fossil fuel companies – just as we invest in a large green energy platform and a diverse range of other low carbon assets – and we challenge them on how they are mitigating the impact of their activities and what action they are taking to achieve the shift to a low carbon future.

Following the publication of the IPCC report we’ve been asked to justify the ethics of these holdings; to explain how our position on climate change risk tallies with investing in – and, by extension, profiting from – companies that are contributing to harmful man-made emissions.

The answer is two-fold.

First comes the legal context: USS is a multi-employer pension scheme, governed under trust law to invest and pay benefits for more than 400,000 scheme members. USS provides a defined benefit pension in the form of the USS Retirement Income Builder. Under this arrangement all assets are pooled and invested in order to provide a specified level of income for our members for retirement.

The trustee’s primary legal duty under trust law, is to invest in the best financial interests of its beneficiaries, with the objective of ensuring there are enough funds available to pay members’ benefits as they fall due.

In practice, this rules out a blanket divestment policy – screening out particular companies, countries or sectors for non-financial or ethical reasons alone – and, as the largest private pension fund in the UK when measured by assets (31 March 2018: £63.6bn), USS’s size and scale means it is obliged to hold a diverse range of investments.

So while we have investments in fossil fuel companies, we also have in excess of £800m in committed financing to UK renewables projects, including investment in funds that encourage or develop clean technologies, as well as funds that develop low carbon energy infrastructure, including wind power and solar PV.

The USS Investment Builder, the defined contribution section of the scheme, offers members ethical fund options, as is appropriate within the legal parameters in which the scheme operates.

The second part of the answer involves how we protect our members’ pensions by acting as engaged stewards of the investments we make on their behalf.

While we believe the legal position is clear, we also believe that:

  • where material, the incorporation of environmental, social and governance (ESG) issues into the financial analysis underpinning investment decisions will improve long-term, risk-adjusted returns;
  • we can use our considerable influence as a major institutional investor to promote positive boardroom action on ESG and ethical issues, and;
  • holding a stake and having a seat at the table provides an avenue for effecting beneficial change at a company level.

That’s why we have the largest Responsible Investment (RI) teams in the UK’s pensions sector.

We have worked hard – and will continue to work hard – to ensure that these considerations form an integral part of the investment decisions we take, within the legal parameters that apply to us.

We will also continue to engage with policy makers globally to ensure they are providing clear and stable environments in which we can make our investment decisions.