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16 November 2021

Progressing our journey to Net Zero - the next steps

Earlier this year USS announced its ambition to be Net Zero for greenhouse gas emissions from its £82bn investment portfolio by 2050, if not before. While this sounds a long way off, for a pension scheme like ours that invests for the very long term to pay members’ pensions, this is not as far away as it seems.

In order to get to Net Zero, the scheme – through USS Investment Management - needs to set interim targets which lay out the path to getting there, something we look forward to announcing next year. But with significant data challenges and investments in multiple sectors and asset classes, just being able to quantify the amount of greenhouse gases emitted by our investments, our carbon footprint, is far from straightforward. And that is before we even get to how we track, and therefore lower that number, over time.

Getting meaningful emissions data from certain asset classes is challenging as it requires determining the emissions of underlying investments. For example, there is no simple way to calculate the carbon footprint of a government bond. Nor is there one benchmark that all investors use as a way to track their progress which creates challenges for comparative purposes.

All that said, we have made progress with the creation of several work streams across the business to ensure we are covering all our asset classes. As a first step we have appointed S&P Trucost, a specialist data provider, to improve our estimates of our carbon footprint across the whole USS portfolio.

This will enable us to establish our starting point - our baseline number – against which we can measure our journey to Net Zero. It is important to say ‘estimate’; we expect there to be marked variability in our measured footprint as new and better data becomes available, even as we seek to drive our carbon footprint lower over time.

We are also evaluating how we can change the benchmark against which the scheme invests and measure the performance of some of our Investment Builder/DC assets, with the aim of introducing a climate “tilt".

In addition to our internal processes, we continue to work hard to support and challenge our investee companies in making their own transition to Net Zero. This engagement, we believe, is by far the most effective way we have in addressing our overall carbon exposure.

There are those who believe that divestment, particularly of fossil fuel companies, would be the answer. However, at USS we believe society cannot divest its way to Net Zero as, for example, if USS sells an asset, another investor will simply buy it, making no difference to the carbon emitted.

Instead, there needs to be a transition to a low carbon future which involves companies shifting their business models. And USS has a role to play in encouraging this. We fundamentally believe that actively engaging with the management teams of the companies in which we invest is the best way to achieve Net Zero. We would far rather be in the room and able to effect positive change, than looking in from the outside with no real leverage.

That is not to say we would not use divestment as a tool if it became clear that a particular sector or company could not transition to Net Zero – a position we made clear in an announcement last year. At that time, USS Investment Management announced the exclusion and ultimate divestment of a number of sectors including thermal coal (where it made up more than 25% of a company’s revenue) because of our belief that this sector cannot easily make that transition.

But more generally, USS’s investment strategy was established with a clear set of Investment Beliefs that govern how we look after, or steward, our assets in which engagement is a key plank of our approach. We believe that better run companies help to achieve better returns for the scheme to pay out members’ pensions and after all, that is the primary fiduciary duty of USS.

There are many recent examples of that approach in practice. For example, in the 12 months to September, we supported 92% of all 52 climate change-related proposals we were able to vote on at our public company investments.

We also co-signed a letter that went to the Big Four audit firms this week, advising them of the urgent need to raise flags with investors where they see companies failing to properly integrate the financial implications of carbon transitioning.

We are also supporting the Transition Pathway Initiative, a pension fund led organisation which measures how companies are transitioning in line with the Paris Agreement. This is critical to enabling investors to support those businesses that are moving ahead, while also engaging with those what are not moving as quickly as they might.

We believe that being front and centre of the debate enables us to hold far more sway with companies in their decision-making at a time when the risks from climate change make this more critical than ever before.

Clearly there is a long way to go, but the hard work has already started and we look forward to being able to update with more concrete plans in due course.

Nothing in this article should be construed as an offer, invitation or general solicitation to buy or sell any investments or securities, provide investment advice or to engage in any other transaction or service.