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Jane Firth, head of responsible investment at Border to Coast Pension Partnership, talks to Romil Patel about the benefits of collaboration, an evolution in the dialogue around systemic risks and why the next decade is pivotal to addressing climate change and biodiversity loss.
What are your top ESG priorities in a year defined by Covid-19 and the associated social and governance issues, as well as a worsening climate emergency?
We operate investment funds for our 11 local government pensions funds, our partner funds, to invest in, and although the responsibility for stewardship remains with the partner funds, the day-to-day administration and implementation is done by Border to Coast on assets managed by us. The size of assets under management gives us a greater voice and influence and we wanted to make sure that we leveraged our scale, so worked together with our partner funds to develop collaborative responsible investment (RI) policies. We have a collective voting policy, and we vote all the shares that we own – either internally or externally managed – according to the policy. The policies are reviewed annually, and our partner funds all feed into the review process. We appointed a third-party voting and engagement provider so that we could vote and engage across all our global mandates and to increase our voice and influence further we have joined collaborative investor initiatives such as Climate Action 100+. Last year we became a signatory to the Principles for Responsible Investment (PRI), which demonstrates our commitment to RI.
We have developed a three-year RI strategy using the six principles of the PRI as a framework. It sets out a timeline for our strategic development and priority actions, taking into account the needs of and support required by our partner funds. Although all the principles are important, we need to focus on some rather than all. ESG integration, reporting and collaboration are the main areas that we’re focusing on over the next three years. We produced our first Task Force on Climate-related Financial Disclosures (TCFD) report this year and that’s key to demonstrating the approach we’re taking on climate change.
The Covid-19 crisis has led to many conversations and discussions about the relevance of ESG issues and that it was seen as almost a luxury that investors could look at in the ‘good times’ – in bull markets. But that has been turned on its head and shown the importance of integrating ESG and monitoring what companies are doing, and that ESG is a bear market necessity. Out of ‘E’, ‘S’ and ‘G’, it tended to be the ‘S’ – the societal factors and social issues – that were the poor relation. It was the area that investors found more challenging to quantify and look at from a financial materiality perspective. Through the current crisis and companies’ responses, it really has brought the ‘S’ factor to the fore. We’re monitoring what companies are doing – whether they’ve been furloughing staff but still taking money from government handouts to support them, if they’ve been cutting dividends but still paying executive bonuses, how they’ve been treating their customers and other stakeholders, how it has impacted the supply chain. This demonstrates the risks for companies around these issues.
There were concerns that climate change would get pushed down the agenda and the focus on the pandemic would mean that the progress made would stop, but it’s the converse. The pandemic has demonstrated what impact something that is a systemic risk can have across the world and financial systems. Investors – asset managers and asset owners especially – are coming out and making more commitments to net zero by 2050 and some on a much more reduced timeframe. We’re also seeing a growing list of countries setting net zero targets for 2050, that’s important with the UN Climate Change Conference of the Parties (COP26) in Glasgow next year.
Diversity is also one of our key engagement themes. It was initially gender diversity on boards, but that has also been broadened out to ethnic diversity reflecting the makeup of the stakeholders and the customers to get that broader diversity of thought, and making sure that companies are up to speed with what’s happening and able to deal with the issues at hand.
What is Border to Coast’s climate strategies to ensure that its investment portfolios are aligned with the Paris Agreement and in what timeframe are you looking to achieve this?
Currently our RI policy incorporates our climate change policy, but we’ve made the decision to break that out and develop it as a standalone policy. It’s such a fast-moving area and we want to make sure that this is covered in greater detail and we’re able to support our partner funds.
We’ve not made a commitment to being net-zero by 2050 as yet. From an organisational perspective, what we tend to do before we make any statements is to make sure that we can implement them – and there are huge challenges about committing to net-zero across whatever timeframe. To set out a target to be net-zero by 2050, we need to have short, medium and long-term targets to understand how we’re going to get there and be flexible around those. We have published our first TCFD report this year, which is the starting point, and we’re building on that. We carbon-footprint all our listed equity portfolios and as our first fixed income mandates launched earlier this year, we’re also footprinting that asset class. This is more challenging than it is for listed equites as there are data gaps.
We launched our first private equity funds in May 2019, and we understand the even greater challenges of getting carbon data for our private equity, infrastructure and debt funds, so this is something else that we need to work with managers and other institutional investors on. As well as conducting carbon footprints, we also use the Transition Pathway Initiative tool and external data and research providers. One area we’re looking at is how we can do scenario analysis on our portfolios, and this is something we’ll be focusing on in 2021.
We work with our external managers, which is part of the monitoring process – understanding how they assess climate risk within portfolios and expecting them to report to us as well. We also need to support our partner funds in their climate change commitments.