Further reading about USS Investment Management’s exclusion policy

As long-term investors, we fully recognise both the importance of meeting our duties to our client, the trustee of USS who provides pensions to more than 400,000 members, and our place in society as a responsible investor. It is as part of considering our investment time horizon, which stretches out over many decades, that late last year we began a review of certain sectors to see whether, over that time period, societal and regulatory shifts may impact expected financial returns. Financial factors have always been paramount in our investment philosophy because that is the legal basis on which USSIM is required to operate. That said, the further out into the future one looks, the more consumer trends, political shifts and other issues combine to present risks that, in some cases, will clearly impact on financial returns.

It is as a result of our analysis coupled with our preference to be more open about sectors we had largely avoided but not made our views public, that we announced plans to exclude and ultimately divest, where possible, from Tobacco manufacturing, Thermal Coal mining (the mining of coal to be burned to create electricity), specifically where this makes up more than 25% of revenues, and companies that may have ties to the following industries - Cluster Munitions (a form of explosive), White Phosphorus (a chemical which self-ignites on contact with air) and Landmines.

While the most immediate result of this will be the divestment of tobacco stocks over the next two years, other investments may follow as we embark on a thorough process to analyse the portfolio. Indeed, as further risks present themselves, this list will be kept under review and we may add to it over time.

We believe that climate change will have a profound impact on society and on the value of investment portfolios. However, we believe that the world will continue to need some level of fossil fuels for the coming decades even as the world transitions to a radically different approach to carbon emissions. As a result, we would rather seek to influence those who, at a regulatory or corporate level, are playing a critical role in bringing about a lower carbon economy. We are committed to supporting this transition through our actions, both internal and external.

We were founder members of the UN-supported PRI (Principles for Responsible Investment) and USS is one of the very few pension schemes who produce a TCFD Report (Climate-Related Financial Disclosures). We have also created specific investment mandates which were designed to have a lower exposure to carbon than the market benchmark. We have also carried out detailed scheme-wide scenario analysis and stress testing – looking at the impact on our portfolio of global warming based on different temperature increases.

At a corporate level, we support engagement as a strategy for change, and are part of the Climate Action 100 Group that recently worked with Royal Dutch Shell on two announcements that puts the company firmly on track to meeting the Paris Agreement. We are also a significant investor in renewables including both on-shore and off-shore windfarms with about £750m invested in total.

Fundamentally, the further we as an investor look out into the future, the more societal tastes, climate risks, political and regulatory issues blur into one and it is up to all of us to play our part. We do not yet live in a zero carbon world but that does not mean that we will not play a role in supporting the transition to a lower carbon economy, while positioning our portfolio, and therefore USS members, to benefit from that.

Date published: 19 June 2020