UK's NEST adopts ‘climate aware’ fund for default strategy

NEST, the UK government-backed defined contribution (DC) master trust, is allocating a portion of the assets in its default strategy to a new “climate aware” fund managed by UBS Asset Management.

It seeded the fund with around £130m (€154m), representing roughly 20% of its current developed equities portfolio and 10% of total investments in the default strategy. It is intended to address risks and capture opportunities associated with the move to fight climate change.

The UBS Life Climate Aware World Equity fund tracks the FTSE Developed Index, but over- and underweights companies depending on their alignment with the transition to a low carbon economy.

For example, a positive “tilt” will be applied to companies providing renewable energy or those making changes to meet targets in line with the internationally agreed goal of keeping global warming to 2ºC above pre-industrial levels.

A negative “tilt” will be applied to companies that are heavy carbon emitters, have fossil fuel reserves, or are not adapting to the 2ºC scenario.

Despite it being a tracker fund it will apply an active voting and engagement policy. This will concentrate on companies that need to adapt their business models to meet climate change goals.

Mark Fawcett, NEST’s CIO, emphasised the mandate was aimed at managing the investment risks associated with climate change as well as being positioned to capture investment opportunities.

In a statement, he said: “As responsible long term investors on behalf of our members, we can’t afford to ignore climate change risks and we’ve committed to being part of the solution.

“Through the UBS Life Climate Aware World Equity Fund we can start reducing our members’ exposure to some of the worst financial impacts. At the same time they’ll get in early in industries and technologies that’ll help the global economy move away from fossil fuels.”

Responding to questions from journalists yesterday evening, he was adamant that this was not a marketing ploy and nor was the pension fund taking a moral stance on climate change.

He noted that the youngest member in NEST is 17 years old and could be investing via the pension fund for 50-60 years, a period during which “climate will change, the world economy will change”.

For its youngest members, the pension fund aimed to invest 30% of the equities in the Foundation Phase of its Retirement Date Funds to the new UBS fund.

NEST’s move was welcomed by the chief executives of ShareAction, the Principles for Responsible Investment (PRI), and the Institutional Investors Group on Climate Change (IIGCC).

NEST is the second UK pension fund in a short space of time to have integrated climate change considerations in the investment strategy for a DC default strategy.

In November last year HSBC Bank UK Pension Scheme adopted a new Legal & General Investment Management multi-factor equity fund with a climate change “tilt” as the DC scheme’s default option.

Fawcett was reluctantly drawn to comment on the difference with the Legal & General fund that the HBSC scheme has adopted, saying there is “a significant difference”.

In addition to being a smart beta fund with, as Fawcett described it, a “climate or low carbon overlay”, the Legal & General fund also provides for divestment from companies – something NEST had sought to avoid.

Fawcett said that NEST had assessed existing products on the market but felt that none of these – active or passive – met the fund’s requirements.

The pension fund had sought a forward-looking perspective by focussing on companies that are transitioning to a low carbon economy, without exclusion or divestment rules.

The new UBS fund is the outcome of a year-long collaboration between the asset manager and NEST, and for NEST is also an output of three years of work on climate change.

NEST was established in 2008 as a UK government-backed vehicle for its auto-enrolment pension policy. It took home the Best European Pension Fund award at December’s IPE Awards in Berlin.