Nest, the largest pension scheme in the UK, has announced a new policy to start divesting from thermal coal, oil sands and arctic drilling by the end of the year in an effort to become net zero by 2050
All companies deriving more than 20% of their revenues from the above practices will be excluded from the investment portfolios by the end of the year. By 2025, all companies involved in these activities that have not committed to a full, accountable phase-out by 2030 at the latest will be sold.
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The new policy will align the £10bn pension fund with the Paris Agreement goals of limiting global warming to 1.5 degrees above pre-industrial levels by reaching net zero carbon emissions across all its portfolios by 2050 at the latest, which will involve halving emissions by 2030 to stay on course for this goal.
Nest said: “We will continue to assess how the companies we invest in contribute to climate change and monitor their alignment with the goals of the Paris Agreement. Companies that we do not consider to be making progress in the transition, or in recognising how climate change will impact their businesses, may be excluded from our portfolios.”
To achieve these goals, Nest intends to move all of its equities into climate-aware portfolio, including emerging market equities, with the aim to reduce exposure to fossil fuels and increase exposure to companies that are contributing positively to the climate transition.
Nest added it plans to allocate more money to investing in climate solutions, starting with an allocation to renewable energy in private equity infrastructure.
The pension fund is also putting more emphasis on researching the impact of climate change on asset-class risks and returns, including running scenario analysis as recommended by the Task Force on Climate-related Financial Disclosures (TCFD). This might mean investing more or less in specific asset classes or regions depending on how they might perform in a low-carbon economy.
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As the pension funds intensifies its focus on climate risks, it will also have higher expected of its managers, saying it expects all incumbents to deliver on its expectations by the end of 2023, beginning its engagement with the equity portion of its holdings.
Nest will review its managers’ progress annually and if any individual portfolio makes limited progress by the end of 2023 the pension fund intends to withdraw assets from these portfolios. Similarly, it will consider divesting from individual companies if engagement is unsuccessful in terms of the speed of transition towards the Paris Agreement goals.
Climate-related expectations will also become a key requirement of its standard tender process for new mandates, and managers that cannot demonstrate their commitment to meeting these expectations will not be selected.
Lauren Peacock, campaign manager at ShareAction, commented: “We warmly welcome Nest’s new policy on climate change and hope it will encourage other pension schemes to up their ambition. Nest’s policy acknowledges the impact of its investments on the planet and takes responsibility for them.
“By committing to engage with companies head on, all the while moving assets out of high carbon sectors, Nest is setting clear expectations for those most responsible for the climate emergency and demonstrating the power of pensions to move them along a more sustainable path.
“It is vital that engagement moves past disclosure and leads to meaningful change by companies if we are to curtail the climate crisis.”