The UK’s biggest private pension fund will move £5bn of its investment in equities to an index avoiding the worst polluters, in a move that will immediately reduce the carbon emissions associated with the shareholdings by 30%.
The Universities Superannuation Scheme (USS), which manages the pensions of British academics, will introduce a climate “tilt” to the money, shifting it to companies that are making efforts to cut emissions.
USS owns assets worth £82bn on behalf of 470,000 members from 330 of the UK’s higher education institutions, of which 40% is held in equities. It is facing pressure from members to decarbonise, as well as a separate dispute over proposals to cut pension benefits that could lead to strike action.
The £5bn stake will move to Legal & General Investment Management (LGIM), which will invest it according to a climate transition index developed by Solactive, a German company. The passively held investments have previously been managed by BlackRock, the world’s largest asset manager, to reflect indices by MSCI. The move will also cut management costs.
As well as the initial 30% fall in emissions associated with the investment, Solactive will ensure that portfolio carbon emissions fall by 7% every year thereafter. Crucially, this calculation will take into account emissions associated with companies’ products, such as oil or gas sold by fossil fuel producers.
“We think this is a significant first step,” said Simon Pilcher, the chief executive of USS Investment Management, which manages the pension scheme’s money. “We are committed to the ultimate decarbonisation of the total assets.
“Our conviction though is that for that total decarbonisation to happen, it is the underlying companies and the way in which the world operates that have to change. So we are not going to exclude our way to net zero. We have to help the businesses in which we invest.”
Although the move affects just part of the scheme’s shareholdings, a spokesperson said more of the portfolio was expected to be moved to climate-aware indices in future.
The Church of England’s pensions managers last week showed how a similar approach could work in practice, announcing they would sell some shares in 28 fossil fuel producers that had not shown clear evidence of plans to reduce emissions.
USS has faced persistent criticism from some of its members for holding large stakes in major carbon emitters, including oil companies such as Shell and other companies that are dependent on burning fossil fuels, such as Heathrow airport. The campaign group Divest USS argues that the scheme has not done enough to vote in favour of climate-focused shareholder resolutions.
Paul Kinnersley, an emeritus professor at Cardiff University and a coordinator of the group, highlighted the fact that USS members included large numbers of climate scientists and other academics who would probably favour rapid divestment.
“Any shift by USS to decarbonise or clean up their investments is obviously a step in the right direction,” he said, “but they’ve been slow about changing and they’ve been slow about sharing detail on the target of net zero by 2050. We’re welcoming it, but there’s a long way for them to go.”
The move could be seen as a blow to BlackRock as it pushes climate-friendly policies, although Pilcher said BlackRock would continue to manage some USS assets. Neither will it make much of a dent in BlackRock’s total assets under management, which rose above $10tn (£7.4tn) at the end of 2021 – the first time any investor has reached that size.
In relation to the dispute over pension contributions, the University and College Union said on Friday that it would set dates for members to strike in the coming days unless USS and employers back down on proposals to cut guaranteed benefits and increase member contributions. The union argues it would be unaffordable for members.