As part of our ESG integration our portfolio managers (across a number of asset classes), conduct analysis of carbon risk (including regulatory risk) where this is material to the investment case. We utilise investment research that incorporates scenario analysis pertaining to carbon risks. We use a number of different tools for assessing emissions risk; Bloomberg's Carbon Footprinting Tool, MSCI Carbon Data and screening tools and Trucost's Carbon Reporting Service.
USS has a long standing commitment to carbon footprinting, which we have been undertaking since 2009 for our public equity portfolio. From these footprints we have sought to factor climate change considerations into our investment decisions where it has a financial bearing.
Initially the carbon footprinting exercise was undertaken using an external specialist data analysis firm. The scheme then started to undertake internal carbon footprints as this enabled us to have a more timely assessment of individual portfolios exposure to carbon. In our latest footprinting, we have attempted to assess the carbon exposures across all asset classes. Given the complexity of this, we have once again started to use the services of a specialist in this area.
For each public equity portfolio, the carbon footprinting enabled the identification of the top 10 assets responsible for contributing to the carbon footprint of that portfolio. This information was communicated to individual portfolio managers and analysts to ensure that they are aware of where their greatest exposures lie. These data can be used for:
- Enhanced engagement
- Improved integration of carbon data in investment models.
USS’s public equity portfolio has consistently had a lower carbon footprint than its benchmark: as a predominantly actively managed portfolio, USS’s internal investment team can choose which companies in which to invest. This enables them to incorporate ESG issues, including climate related factors, into their decisions. As previously noted, we publish our pubic equity carbon footprint as part of our commitment to the Montreal Pledge. The detailed results of this exercise were presented to individual portfolio managers and the trustees of the scheme. See https://www.uss.co.uk/~/media/document-libraries/uss/investments/riactivities/carbonfootprintmontrealpledge.pdf?la=en
The scheme is unusual in that it has undertaken carbon footprinting across a number of assets (including fixed income, direct assets and hedge funds). We do not believe it appropriate to publish these footprint data at the present time for a number of reasons including the following:
- The methodologies for a number of asset classes are nascent and therefore it seems premature to publish footprint data based on methodologies which will change.
- Carbon data itself is lacking for some asset classes – for example private equity.
- Whilst we collect data on energy use for our direct real estate assets, we do not collect tenant data. As a result, the footprints do not necessarily give a meaningful analysis.
To stimulate debate on and development of carbon footprinting methodologies, USS participated in a video interview with Trucost / S&P Dow Jones Indices to discuss the approach USS have taken to measure carbon footprinting across all asset classes (not just public equities), and some of the challenges we encountered when we tried to do this. This can be viewed here: https://www.uss.co.uk/how-uss-is-run/views-from-uss/carbon-footprinting.
USS also participated in discussions on the issues facing carbon footprinting with a group of other asset owners. A report of these discussions, “If carbon footprinting is the answer, then what is the question?”, which was published to help move forward the development of cross asset class footprinting, is available here:
The Transition Pathway Initiate (TPI)
USS Investment Management helped develop and launch (in January 2017) the Transition Pathway Initiate (TPI). Partnering with other global pension funds, FTSE and the Grantham Institute (part of London School of Economics) this project tracks companies’ implementation of policies and practices that manage a shift to a 2 degree world. The results of the assessments are freely available to other investors - see http://www.lse.ac.uk/GranthamInstitute/tpi/ - and can be used in both stewardship activities and to enable USS Investment Management’s fund managers to have an understanding as to where companies are in their transition.
The TPI assesses how companies are preparing for the transition to a low-carbon economy in two ways:
- Evaluates and tracks the quality of companies’ management of their greenhouse gas emissions and of risks and opportunities related to the low-carbon transition.
- Evaluates how companies’ future carbon performance would compare to the international targets and national pledges made as part of the Paris Agreement.
The TPI has thus far released reports on oil and gas, mining, utility, steel and cement sectors (all high carbon), with the results of these assessments being published through an online tool – see http://www.lse.ac.uk/GranthamInstitute/tpi/. The TPI analysis of company climate change management is likely to be used in the CA 100+ project (details below).
USS has also written to heavy carbon emitting companies in our listed equity portfolio. We asked these companies to explain what action they had taken in response to the Paris Agreement and what scenario analysis was undertaken. We encouraged firms to go public with this disclosure. The responses received helped to inform our engagement activities.
USS is a participant in GRESB and GRESB Infrastructure and we expect our externally appointed real estate investment managers and direct infrastructure assets to participate.
USS continues to hold a position as advisor to the IIGCC board. The IIGCC provides a forum for investors to agree common and consistent expectations on disclosure on the management of climate change risk and a conduit for the communication of these expectations to investee companies. We consider that the IIGCC has made an invaluable contribution to improving disclosure on climate change risk through these activities. See http://www.iigcc.org/.
For additional information on the scheme's approach to climate change and activities in this area see: https://www.uss.co.uk/how-uss-invests/responsible-investment/activities/climate-change.