USS David Russell, Head of Responsible Investment
Innes McKeand, Head of Strategic Equities
Alexandra Bradshaw, Investment Communications Manager
Rebecca Mason, Senior Legal Counsel
DivestUSS Paul Kinnersley, Cardiff University
Brian Hoskins, Imperial
Bill Spence, QMUL
Kat Thorne, KCL
Mark Maslin, UCL
The path to Net Zero
USS outlined their recent activity regarding reducing the carbon footprint of the USS investment portfolio.
USS is clear about its ‘Net Zero 2050 or earlier’ ambition and is working hard to achieve this. Much of the detail of recent progress is described in its TCFD report 2022. However 1) the data are incredibly sensitive so relatively small changes can lead to a much larger overall effect; 2) the data are very patchy; 3) the carbon intensity of some assets is very large; 4) the decline in carbon intensity will not be a smooth path; 5) Scope 1 and 2 data is much more available and reliable than Scope 3 but USS hope to include the latter in their TCFD report 2023.
The challenge of achieving ‘net zero’ is shared across different asset classes (fixed income, private markets, equities etc) and portfolio managers have responsibility for addressing the need for carbon reduction in their particular areas with them being held to account for their results.
An example of where it is difficult to get data is the Scope 3 data for banks.
USS is working with other organisations and pension funds, such as Cambridge University – to collaborate and share learning. A recent initiative was the decision to implement the ‘Climate tilt’ on £5 billion of the USS portfolio.
USS also pointed out that societal change was needed to achieve net zero and that this wasn’t something they could achieve on their own. However, USS did highlight the work they’re doing with policymakers to help drive change in this area – information on which can be found in their TCFD report 2022.
DivestUSS raised concerns that USS was not taking fast enough action to decarbonise. It was pointed out that USS and others had been trying to engage with Shell for many years but Shell was continuing to explore and exploit new oil and gas fields. DivestUSS stated that this was evidence that ‘engagement’ wasn’t working; however USS suggested that Shell was changing its activities. DivestUSS also warned USS of the disastrous consequences of not rapidly reducing carbon emissions. DivestUSS pointed out that: 1) some other pension schemes particularly in Europe were divesting rapidly from fossil fuels which could leave USS holding stranded assets; 2) in DivestUSS’s opinion USS was ‘behind the curve’ in its efforts to reduce carbon emissions; 3) that there were opportunities to work with other pension funds and 4) that the size of USS meant that they could have considerable influence and should be supporting those industries that are completely based on the energy transition much more, such as renewables.
USS highlighted that they are involved in a wide range of collaborative initiatives with other pension funds, asset owners and asset managers (having for example established the IIGCC, been a founder signatory to the UNPRI and on the Board of the Transition Pathway Initiate) to help drive change, and they understand the power of collective engagement. USS also highlighted that it already had considerable investment (£1.9bn) in renewable energy and has appetite for more. However, there was a limited opportunity to invest in renewable energy and considerable competition among investors for this type of asset.
Ethics and investment decisions
DivestUSS expressed the view that the Climate Emergency poses both financial risks and ethical risks to USS and asked for clarification of the degree to which ethical considerations play a part in investment decisions. Citing the examples of the divestment from tobacco, unconventional weapons and thermal coal and the recent large reduction of the holding in Glencore, DivestUSS asked if these decisions were made on an ethical basis. DivestUSS also asked if members’ views were to be considered in making investment decisions – while USS agreed that member views are important and are taken into account via regular surveys, USS stated that it must be remembered that the primary drivers for investment decisions must be financial. DivestUSS noted that the respondents to the Maastricht Survey of USS members (excluding retired members) had shown strong support for fossil fuel divestment. USS pointed out that a summary of how USS provides ethical investment options for members with savings in the Investment Builder and the Maastricht survey results can be found on the USS website.
The legal representative stated that the response rate to the Maastrict survey had been too low to be taken as a clear statement of members’ wishes and furthermore that ethical considerations alone could not be taken into account when USS was making financial decisions – USS highlighted that they have a primary fiduciary duty to invest in the best financial interests of members and beneficiaries. USS noted that changes in trust law would be needed before USS could take a different approach.
USS went on to say that for USS to stop investing in fossil fuels the case would have to be made that these investments were not likely to produce beneficial financial returns over the long-term and that alternative investments would be more profitable.
In response to a specific question about Lukoil USS responded that they were not making any income from their holding. They stated that while USS has a residual position in Lukoil, holdings in the company were reduced from November 2021 before the Russian invasion of Ukraine, but market liquidity and eventual closure have prevented a full exit, and they are not receiving dividends. Similarly when DivestUSS raised concerns about the performance of Thames Water USS reported that they had not been taking any dividends from Thames Water since USS first invested in 2017 and instead the company was reinvesting to drive long-term improvements.
Investment strategy
USS reported that they considered that engagement with companies was working; that opportunities for ‘green’ investments were extremely limited and that they were often in competition with oil and gas companies, who have much deeper pockets than USS, that were trying to diversify their own portfolios. USS’s investments in fossil fuel companies were only a small part of their total portfolio. USS is continuing to lend money to oil and gas companies through the Corporate Bond markets and it is not possible to restrict these investments to, for example, a ‘renewable’ branch of BP. USS did however highlight the work they’re doing with banks on corporate lending, referencing an IIGCC sector piece on banks and climate change coming out in January and some work with Cambridge University. USS also noted a recent discussion with JP Morgan on its funding of fossil fuels.
DivestUSS responded that if fossil fuels companies were only a small part of the USS portfolio divestment from fossil fuels would probably have little financial impact on USS funds but would be an extremely positive statement to its members and other pension funds. In addition, DivestUSS recognised that some mining companies were involved in producing the raw materials for renewable energy systems and that some oil products were needed. However, DivestUSS could see no place for coal and gas nor for investing in the associated distribution networks.
Communication with members
From the discussions, it was apparent that DivestUSS did not know that USS was not earning income from Lukoil and Thames Water. USS asked that DivestUSS take care not to post inaccurate or misleading information on social media. It was also pointed out that although USS lists its ‘top 100’ public equity holdings information was not provided on the smaller public equity holdings. Although members could not expect to be provided with information about every investment decision, given the membership, DivestUSS believe USS should provide as much information as practical to their members. DivestUSS asked whether USS could follow the example of Australian pension funds, which are required to publish details of all their investments. In response, USS stated that they would consider how they might provide improve holdings disclosure.
How DivestUSS could help USS
Given its membership, DivestUSS felt strongly that USS should be both using the knowledge and skills of its membership to develop innovative approaches to address the climate emergency and the need for USS to make financial returns long into the future.
DivestUSS suggested that USS members may be able to suggest innovative opportunities for investment. For example, USS could work with the UK power supply companies to form a company to install air source heat pumps across the UK. DivestUSS also proposed investing in hydrogen. USS responded that government plans in this area were still at a very early stage and the sector was a long way away from being commercially viable.
Surveying members – DivestUSS could help by reviewing questions and publicising surveys by USS to seek members’ views.
Working with Universities – DivestUSS considered that USS could do more to work with universities which are themselves facing the same challenges of the need to decarbonise.
Next steps
It was agreed that the most appropriate time for another meeting would be after the USS TCFD report is produced (around July-August 2023), and annually thereafter.
DivestUSS agreed to produce a summary of the meeting which would be circulated with USS before any further distribution.
DivestUSS 