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Environment Agency Pension Fund

PRI reporting framework 2020

You are in Strategy and Governance » ESG issues in asset allocation

ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

13.1. Indicate whether the organisation carries out scenario analysis and/or modelling, and if it does, provide a description of the scenario analysis (by asset class, sector, strategic asset allocation, etc.).

Describe When we reviewed our strategic asset allocation in 2019, we modelled the impact of climate change on our portfolio for both transition and physical risks. We did this through Mercer's Investing in Climate Change: The Sequel.

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]


SG 13 CC.

13.4 CC. Describe how your organisation is using scenario analysis to manage climate-related risks and opportunities, including how the analysis has been interpreted, its results, and any future plans.

Describe

When we reviewed our strategic asset allocation in 2016/17, we modelled the impact of climate change on our portfolio.  We did this through Mercer’s Investing in a Time of Climate Change model. This study provided four climate change scenarios and looked at impacts across different asset classes over 10 and 35 year time horizons.  The key conclusions were the Fund was well positioned for a 2°C scenario at a total fund and asset class level. In particular, it highlighted the benefits of investing in sustainable equities and real assets to manage climate risks and opportunities as part of a transition to a low carbon economy. The EAPF report is available on the climate risk area of our website. We are currently using Mercer’s updated model again in 2019/20 as part of our review of our strategic asset allocation.

13.5 CC. Indicate who uses this analysis.

13.6 CC. Indicate whether your organisation has evaluated the potential impact of climate-related risks, beyond the investment time horizon, on its investment strategy.

Describe

When we reviewed our strategic asset allocation in 2016/17, we modelled the impact of climate change on our portfolio.  We did this through Mercer’s Investing in a Time of Climate Change model. This study provided four climate change scenarios and looked at impacts across different asset classes over 10 and 35 year time horizons.  The key conclusions were the Fund was well positioned for a 2°C scenario at a total fund and asset class level. In particular, it highlighted the benefits of investing in sustainable equities and real assets to manage climate risks and opportunities as part of a transition to a low carbon economy. The EAPF report is available on the climate risk area of our website. We are currently using Mercer’s updated model again in 2019/20 as part of our review of our strategic asset allocation.

13.7 CC. Indicate whether a range of climate scenarios is used.

13.8 CC. Indicate the climate scenarios your organisation uses.

Provider
Scenario used
IEA
IEA
IEA
IEA
IEA
IRENA
Greenpeace
Institute for Sustainable Development
Bloomberg
IPCC
IPCC
IPCC
IPCC
Other

Other (1) please specify:

          Not in public domain
        
Other
Other

SG 14. Long term investment risks and opportunity

14.1. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following are considered.

14.2. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

Specify the AUM invested in low carbon and climate resilient portfolios, funds, strategies or asset classes.

Total AUM
trillions billions millions thousands hundreds
Currency
Assets in USD
trillions billions millions thousands hundreds

Specify the framework or taxonomy used.

This captures the proportion of the fund invested in low carbon, energy efficient and other climate mitigation opportunities.

 

 

 

other description

          Our service provider EOS at Federated Hermes engages companies specifically with a view to enhance disclosure, integrate actions and policies around climate-related risks and investments.
        

14.3. Indicate which of the following tools the organisation uses to manage climate-related risks and opportunities.

14.4. If you selected disclosure on emissions risks, list any specific climate related disclosure tools or frameworks that you used.

The Fund uses a range of tools to help us establish the level of risk relating to climate change issues. These are more developed and quantitative in some asset classes more than others. In listed equities and bonds, fossil fuel exposure analysis and carbon footprinting provides us with useful information on the absolute exposure and the relative carbon intensity of holdings and summarises the indicators that underpin the reporting against the targets in our climate change goals.

14.5. Additional information [Optional]

Please see our Responsible Investment Strategy - https://www.eapf.org.uk/investments/policies


SG 14 CC.

14.6 CC. Provide further details on the key metric(s) used to assess climate-related risks and opportunities.

Metric Type
Coverage
Purpose
Metric Unit
Metric Methodology
Climate-related targets
          Our objective is to ensure that our Fund’s investment portfolio and processes are compatible with keeping the global average temperature increase to below 2°C relative to pre-industrial levels, in 
line with international government agreements.
        
          
        
          We aim by 2020 to: 

• Invest 15 per cent of the fund in low carbon, energy efficient and other climate-mitigation opportunities. This will contribute to our wider target to invest at least 25 per cent of the Fund in clean and sustainable companies and funds, across all asset classes. We trust that 
this will make our portfolio more resilient to the impacts of climate change and adapt to the climate change that is already in the system. 

• Decarbonise the equity portfolio, reducing our exposure to ‘future emissions’ by 90 per cent for coal and 50 per cent for oil and gas by 2020, compared to the exposure in our underlying benchmark as at 31 March 2015. ‘Future emissions’ is the amount of greenhouse gases that would be emitted should these reserves 
be extracted and ultimately burnt, expressed in tonnes of carbon dioxide equivalent. We think that this will reduce the risk of our portfolio by anticipating the reductions needed to move to a low-carbon economy. 

• Support progress towards an orderly transition to a low-carbon economy through actively working with asset owners, fund managers, companies, academia, policy makers and others in the investment industry. We recognise that active stewardship is the most effective way to tackle systemic risk.
        
Weighted average carbon intensity
          
        
          tCO2e/mn GBP revenue
        
          Individual company Carbon-to-revenue intensity multiplied by its weight in the portfolio
        
Carbon footprint (scope 1 and 2)
          
        
          Tonnes CO2e/mn GBP revenue
        
          Direct + First Tier Indirect emissions, i.e. Scope 1+ Scope 2 + Remaining 1st tier indirect.
Apportioned GHG emissions divided by apportioned revenues
        
Portfolio carbon footprint
          
        
          Tonnes CO2e/mn GBP revenue
        
          Apportioned GHG emissions divided by apportioned revenues
        
Total carbon emissions
          
        
          Tonnes CO2e
        
          Direct  and First Tier Indirect scope

This is an absolute metric 
Apportioned carbon emissions for Direct and First Tier Indirect scopes
        
Carbon intensity
          
        
          Tonnes CO2e/mn GBP revenue
        
          Apportioned GHG emissions divided by apportioned revenues
        
Exposure to carbon-related assets
          
        
          Weight (%) of companies in a portfolio 

Tonnes CO2
        
          Fossil fuel exposure is the combined weight of companies in a portfolio that derive any revenues from coal, petroleum or natural gas power generation. 


Future financed emissions represent the  carbon emissions that would be released to the atmosphere if owned fossil fuel related assets were all burnt
        

14.7 CC. Describe in further detail the key targets.

Target type
Baseline year
Target year
Description
Attachments
          by 2020
        
          
        
          Invest 15 per cent of the fund in low carbon, energy efficient and other climate-mitigation opportunities.
        

          by 2020
        
          
        
          Our wider target to invest at least 25 per cent of the Fund in clean and sustainable companies and funds, across all asset classes. We
        

          by 2020
        
          
        
          Decarbonise the equity portfolio, reducing our exposure to ‘future emissions’ by 90 per cent for coal and 50 per cent for oil and gas by
        

          
        
          
        
          
        

          
        
          
        
          
        

14.8 CC. Indicate whether climate-related risks are integrated into overall risk management and explain the risk management processes used for identifying, assessing and managing climate-related risks.

Please describe

Our Investment Strategy, designed to both robustly manage risks and take positive opportunities, has delivered 9.7% average annual investment returns over the last 5 years. Our successful financial performance is supported by our deep commitment to investing responsibly and we believe it is paramount in our ability to deliver sustainable, long term returns.

We continue to operate in a period of rapid change. Whether social, political, technological or climatic, which impact everyone, to those more specific to us as a Fund, including organisational restructuring and the requirement to pool our assets, change has been all around us. All bring opportunities and risks, and demonstrate the need for a robust approach to responsible investment and strong governance.

Responsible Investment remains at the core of our fund and it is more pressing than ever as we face a climate emergency. Evidence over the last year from the Intergovernmental Panel on Climate Change (IPCC) shows that we have 12 years to limit global temperature rise to 1.5 ºC above pre industrial levels. Through our Policy to Address the Impacts of Climate Change, we demonstrate to our members we have a credible plan to deliver strong long term financial returns as the impacts of climate change materialise.  We believe financial risk and opportunities will come from both these impacts, regulation and policy, alongside increased competition from alternatives and technological innovation.

14.9 CC. Indicate whether your organisation, and/or external investment manager or service providers acting on your behalf, undertake active ownership activities to encourage TCFD adoption.

Please describe

Investors have the power to influence and change behaviour globally. As the Environment Agency Pension Fund,

there are specific priorities where we want to work with the investment community to bring about change.

These are:

• Climate Change – helping investors understand and manage the financial risks from climate change

• Using resources sustainably, with a particular emphasis on reducing plastics in the environment

• Water – managing water quantity and water quality

For these priority areas, we will engage to bring about greater disclosure and improve environmental outcomes,

including through the Taskforce on Climate-Related Financial Disclosures (TCFD).

In 2019 we launched an internal campaign to attend company AGMs and ask a question of the Board and this has included on TCFD reporting and on scenario planning.


SG 15. Allocation of assets to environmental and social themed areas

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.2. Indicate the percentage of your total AUM invested in environmental and social themed areas.

39 %

15.3. Specify which thematic area(s) you invest in, indicate the percentage of your AUM in the particular asset class and provide a brief description.

Area

Asset class invested

82 Percentage of AUM (+/-5%) per asset class invested in the area
4 Percentage of AUM (+/-5%) per asset class invested in the area
8 Percentage of AUM (+/-5%) per asset class invested in the area
6 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

We have specific thematic allocation to clean technology implemented through specialist teams for infrastructure, public and private equity.

We have flagged this under infrastructure as this is the asset class under which the most intense increase in allocation is occurring.

We set ourselves the target of at least 25% of our investments in clean technology and other sustainable opportunities. We currently have in the region of 30%.

Investments include;

  • Property opportunities targeting energy efficiency, urban regeneration and sustainability
  • Venture capital funding the next generation of technologies that provide new solutions –such as electric vehicles and LED lighting
  • Long term sustainable infrastructure, such as renewable energy and energy efficiency
  • Listed companies demonstrating best practice in sustainability, improving efficiency and reducing social and environmental impacts

 

Asset class invested

11 Percentage of AUM (+/-5%) per asset class invested in the area
4 Percentage of AUM (+/-5%) per asset class invested in the area
51 Percentage of AUM (+/-5%) per asset class invested in the area
34 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

Please see description in Energy Efficiency above.

We use the FTSE sustainability classifications (and are mindful of the new EA taxonomy going forwards).

Asset class invested

8 Percentage of AUM (+/-5%) per asset class invested in the area
55 Percentage of AUM (+/-5%) per asset class invested in the area
37 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

The majority of EAPF's property investments contribute to and are rated by GRESB and achieve 'Green Star' (highly rated) standard.

A particular example is our investment in the Low Carbon Workplace Fund.  The Fund's objective is to acquire under-managed UK office properties and to refurbish them with the explicit goal of improving their environmental performance.  The Fund was launched in March 2010 and at 31 December 2019, it held 7 refurbished properties with a market value of £261.5m.  The assets, on average, have enjoyed a 67% increase in EPC rating since acquisition by the Fund and all properties are rated ‘Excellent’ by BREEAM.

Asset class invested

44 Percentage of AUM (+/-5%) per asset class invested in the area
4 Percentage of AUM (+/-5%) per asset class invested in the area
31 Percentage of AUM (+/-5%) per asset class invested in the area
21 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

To ensure the investment followed an ESG approach aligned to that of EAPF, The Townsend Group in conjunction with EAPF negotiated a set of ESG investment criteria which all investors will benefit from. This included an undertaking to have investments FSC, PEFC or equivalent certifications in place; no investments in natural tropical rainforests or conversions; no investments in the Amazon Biome and other areas supporting predominantly high cerrado; no investments which would lead to resettlements and/or deterioration of socially/culturally important sites; and ensuring progress is reported annually on ESG matters.

Asset class invested

44 Percentage of AUM (+/-5%) per asset class invested in the area
4 Percentage of AUM (+/-5%) per asset class invested in the area
31 Percentage of AUM (+/-5%) per asset class invested in the area
21 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

We Invest in agriculture through professionally managed funds.  Key issues include concern over “land grab”, or more generally growing high value groups in stressed situations, as well as management issues such as water use, run off, and chemical use. Livestock production, particularly cattle, has particularly significant environmental impacts.

In guidelines we provide to the manager selecting the funds we include the requirement to apply the following frameworks;

  • The Principles for Responsible Investment in Farmland
  • The UN-PRI established a Farmland Working Group to address these concerns and to incorporate existing work done by a group of institutional investor signatories to the PRI on the topic of farmland investment.
  • UN Committee on World Food Security (CFS) Voluntary Guidelines on Tenure
  • The Voluntary Guidelines represent significant progress made in the governance of natural resources and food security.
  • Roundtable for Sustainable Palm Oil (RSPO)

15.4. Please attach any supporting information you wish to include. [OPTIONAL]



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