The UK’s largest auto-enrolment provider is stress-testing using a 1.5°C scenario for its climate aware fund, while also planning to investigate in more detail risks linked to the physical impacts of climate change, according to its new responsible investment report.

Among a range of other past and planned steps, the report also disclosed that NEST had become a member of investor engagement group Climate Action 100+.

The climate aware fund is an equity fund used as part of NEST’s default strategy. Developed by the provider in partnership with UBS Asset Management, it applies “tilts” to over- and underweight companies depending on their alignment with efforts to rein in climate change.

Currently the global warming target that is used for the climate aware fund is 2°C above pre-industrial levels, but the pension fund is testing using a 1.5°C scenario instead.

“The least ambitious end of the Paris Agreement was set at 2°C, which will still significantly worsen the risk of drought, floods, extreme heat and poverty for hundreds of millions of people,” said Diandra Soobiah, NEST’s head of responsible investment.

“Setting a 1.5°C target is a stronger goal which we will push hard to support.”

The master trust also revealed that it was looking at expanding the sectors covered by the climate aware fund methodology, with agriculture, automakers and retail currently not included.

Separately, NEST revealed a plan to investigate physical climate change risks over the coming year.

“We want to understand how risks can be identified, measured and factored into investment decisions,” it said.

Questions it plans to work through include what disclosures and information are required to help asset owners assess physical risks and whether it would be possible to “structure a corporate engagement around this”.

Another question looked at was how insurers and reinsurers were valuing and insuring assets and managing risks.

“Evidence shows there could be reputational risks if we don’t take these issues seriously”

NEST 2019 responsible investment report

In investment, climate change risks are generally broken down into two types: transition risks and physical risks. Transition risks are risks stemming from moves to combat climate change whereas physical risks are those linked to the impacts of climate change itself.

NEST’s responsible investment report also relayed results from a roundtable the pension provider held on how to engage with its members on the topic of responsible investment.

“Evidence shows that members would like to know more about responsible investment and that there could be reputational risks if we don’t take these issues seriously,” the multi-employer pension provider wrote.

“We should be braver in publicly demonstrating what we’re doing.”

ShareAction scrutiny

NEST was the only master trust out of 16 deemed to have a “leading” approach to climate change in a report published this week by campaign organisation ShareAction.

It said that 14 – all apart from NEST and TPT Retirement Solutions – were not directly engaging with large global companies on their contribution to climate change.

Instead, ShareAction said, they were delegating responsibility for voting their shares and climate engagement activity to their asset managers.

To score highly in the organisation’s assessment master trusts had to show they were at least engaging with their asset manager on stewardship and receiving reports from the manager on engagement activities.

ShareAction also found there had been an increase in the adoption of ESG or climate funds in master trusts’ default asset allocation.