The in-house manager for the UK’s £68bn (€75bn) Universities Superannuation Scheme (USS) has decided to exclude investments in selected tobacco and weapons manufacturers and coal miners, it announced today, saying these had been deemed “financially unsuitable for the pension scheme over the long-term”.
The exclusions apply to tobacco manufacturing, thermal coal mining where this accounts for more than 25% of a company’s revenues, and companies that may have ties to cluster munitions, white phosphorous, and landmines.
Announcing its plans, USS Investment Management said: “This statement marks the first time that USS Investment Management has officially announced its position on exclusions and comes at the end of a detailed review of the long-term financial factors associated with investing in certain sectors.”
It attributed the decision to its concluding that “the traditional financial models used by the market as a whole to predict the future performance in these sectors had not taken specific risks into account”.
“These included changing political and regulatory attitudes and increased regulation that USS Investment Management consider will damage the prospects of businesses involved in these sectors in the years to come.”
The manager said it would have fully divested from the relevant companies, “where they exist and where controllable”, within two years, although most sectors would be formally excluded much earlier.
As at 30 April USS had tobacco investments worth around £190m. A spokeswoman said it was still in the process of working out the holdings that would be affected by its decision regarding company ties to cluster munitions, and that it did not have any pure-play thermal coal holdings. This means USS does not have holdings that would be affected by the thermal coal exclusion criterion. NGOs have previously criticised the 25% of revenues threshold, which has also been adopted by investors such as BlackRock, for not covering some of the world’s biggest coal mining companies, such as BHP Billiton.
USS said the exclusions it announced today would be kept under review and may be added to over time.
“This will balance keeping the financial promises made to hundreds of thousands of members with investing in a responsible way over the long-term”
Simon Pilcher, CEO of USS Investment Management
A statement from campaign group ShareAction framed USS’s decision in terms of USS members’ views, saying it followed “a long and at times tense history of member-driven engagement” and indicating the scheme faced calls to divest from fossil fuels.
“The new CEO of the USS Investment company, Simon Pilcher, appears now to be open to the types of changes long demanded by scheme members to reflect widely-held ethical preferences of people working and teaching in UK universities and the financial impact of societal pressures to respond to the climate emergency,” it said.
Catherine Howarth, chief executive officer of ShareAction, said: “There is much further to go with this process, and we hope USS will look now to follow other large UK schemes in establishing a robust new approach to regularly ascertain the views of members on investments held for their benefit, building members’ preferences into the scheme’s stewardship policy as well as taking further, bold steps to halt investment in fossil fuels.”
Striking a balance
In USS’s statement, Pilcher, who joined USS from M&G Prudential last autumn, said: “This is a major development for us and one that will balance both keeping the financial promises made to hundreds of thousands of members in the higher education sector, with investing in a responsible way over the long-term.
“As the majority of USS’s assets (around 75%) are invested directly by USS Investment Management, we will have a great deal more control over this process than other pension schemes, and where we work with external managers, we will work diligently with them to implement our conclusions via their products.’’
Alongside Japan’s Government Pension Investment Fund and the California State Teacher’s Retirement Scheme, USS was a founding signatory of a statement advocating for more of a shift to a long-term approach to investing and business – it has since been signed by 11 further major asset owners.
Since Pilcher’s arrival at USS the investment arm has announced it was closing its developed market equities team as part of a shift away from traditional stock-picking to an approach more focussed on the impact of environmental, social and other long-term factors.
According to ShareAction, a group of members called Ethics for USS wants the scheme to divest from fossil fuels, in which it had £1bn invested as at the end of December.