Two UK public pension funds have invested in new low-carbon tax transparent funds launched by BlackRock and Robeco.

The £3.5bn (€4bn) Environment Agency Pension Fund (EAPF) has invested £150m in Robeco’s quant sustainable fund, which is the first fund available under its newly launched authorised contractual scheme (ACS) structure.

The fund seeks to invest in value stocks while using quantitative investment techniques to lower the carbon footprint of the portfolio’s assets. It was set up in the third quarter of last year.

Craig Martin, chief pensions officer at the EAPF, said: “In 2017 the EAPF ran a search for a manager to provide what we term ‘sustainable enhanced value equities’.

“Robeco were selected for their ability to use quantitative investment techniques to provide a low carbon approach to ‘value’ investing, within a low-cost, tax-efficient, pooled fund solution.”

EAPF started looking into options for reducing the carbon dioxide emissions of its value equity investments during the fund’s 2015-16 financial year. As a first step in the process it had switched indices, moving from a Research Affiliates Fundamental Index (RAFI) tracking 3,000 companies to the RAFI 1000 index, which has lower carbon exposure.

The pension fund for the London borough of Southwark, meanwhile, has invested in a low-carbon equity tracker fund that BlackRock has launched as part of an expansion of its tax transparent fund range. The manager also launched a multi-factor index fund.

Duncan Whitfield, strategic director of finance and governance at London Borough of Southwark Pension Fund, said: “Southwark recognises the importance of responsible investing and is fully committed to the continued reduction in fossil fuels exposure. Our investment in the BlackRock ACS World Low Carbon Equity Tracker Fund exemplifies this commitment and our focus on generating a positive long-term sustainable impact.”

BlackRock launched its first – and the UK’s first – tax transparent fund in 2014, while Robeco announced the launch of its ACS today. 

Both target UK local government pension schemes (LGPS) and their emerging asset pools, in addition to other institutional investors.

An ACS is a UK pooled investment fund structure that offers tax benefits for institutional investors compared with an investment in a unit trust or fund company. The tax benefits arise from contributors in the fund being treated as if they were directly invested in the underlying assets. This is different to a unit trust or fund company, where dividend income received by the fund is charged a rate of withholding tax based on the domicile of the fund vehicle.

Peter Walsh, head of Robeco UK, said: “This ACS allows us to take advantage of the unique benefits provided by a pooled investment, and create a highly tax-efficient proposition that utilises the opportunities afforded to pension funds through tax treaties across the world.”

The LGPS asset pools are either establishing their own ACS structures or hiring external providers to operate an ACS. LGPS Central, for example, last week announced it had obtained regulatory authorisation to run an ACS, while the Wales Pension Partnership has hired Link Asset Services to operate the vehicle in which eight Welsh LGPS funds will pool assets.

EAPF is part of the Brunel Pension Partnership, and Southwark pension fund is a shareholder in London CIV, both of which are operating their own ACS structures.