UK - Active management can reduce the environmental footprint of equity holdings by a third, the £1.6bn (€1.8bn) Environment Agency Pension Fund (EAPF) has claimed.

After looking at the environmental footprint of its equity investments over five years - a global first, the scheme said - the EAPF found that its engagement policy reduced not only total environmental cost, but also the cost's overall share as part of its portfolio.

Howard Pearce, head of environmental finance and pension fund management at the agency, said environmental, social and governance (ESG) issues were becoming increasingly indicative of both the quality of company management and its future performance.

"Well-governed companies tend to produce better and more sustainable risk-adjusted returns than poorly governed companies," he added.

According to the scheme, environmental costs arising from its £655m equity portfolio were £19m last year, down from £20m in 2006 at a time when total equities were worth almost £100m less.

Through its fund managers, the EAPF encourages companies to improve their environmental policies, as well as reporting and governance procedures.

It said more than 60% of the 130 companies held in its active fund had cut environmental costs since 2007 relative to turnover, while almost all (97%) were engaged with by fund managers at some point between 2006 and last year.

The EAPF encourages fund managers to pay for environmental footprint assessments and then employ the results across its entire investment universe, as well as with other clients.

The fund said its actively managed portfolio outperformed the MSCI World Developed Countries index by 2.5% over the five-year period between 2006 and now.