The UK’s Environment Agency Pension Fund has outlined its new climate change policy, which aims for its portfolio to limit global warming to 2°C.
The fund argued the new policy paper, built on a decade’s worth of work on its investment strategy, was a not “knee-jerk reaction”.
As part of the policy, the fund will allocate 15% of its assets to low-carbon and energy-efficient holdings, or other assets used to mitigate climate change.
It said it would look to reduce the carbon within its equity portfolio even further – down by more than 40% since 2008 – so that future emissions stemming from coal holdings would be down by 90%, while those from oil and gas would be halved, compared with its exposure at the end of the most recent financial year.
The EAPF said the divestment of certain holdings, based on risk analysis, would be “appropriate” but added that engagement would remain an essential part of its strategy to help create a low-carbon economy.
In line with its pledge to divest only where a risk-backed case warranted it, the pension fund reiterated that it would continue to act as a universal asset owner.
It said its new approach recognised that “climate actions, or inaction, of one company can positively or negatively affect another [company] and the overall economy”.
The EAPF said it would encourage asset managers to increase exposure to companies with business strategies targeting a 2°C world, in line with the Intergovernmental Panel on Climate Change’s recommendations.
It added that the policy would take time to implement and required “perseverance” on its part, but it said it would continually improve its approach, with a review of the policy planned for 2017.
Alice Garton, a lawyer at UK charity ClientEarth, said the EAPF’s move was an “exemplary show of leadership”.
“The fund’s commitment to align its investment strategy with a 2°C scenario sets it apart from those other funds that do not take climate risks seriously,” she said.
Garton, whose organisation had previously warned that funds not taking climate risk seriously risked failing their members, warned that “laggard” funds could face legal challenges where the failure to act on climate risk caused losses.