Priority 2: Reach net zero by 2045
Target: Reduce our listed equity emissions by 43% by 2025 and 77% by 2030 (Scope 1 & 2 emissions)
Net Zero means cutting greenhouse gas emissions to as close to zero as possible2.
As long-term investors, we need to act, as our portfolios may be exposed to increasing physical, regulatory, legal and nature risk. This in turn will impact on the value of our investments.
We need the companies we invest in to reduce their emissions significantly and align to net zero. We also need to engage effectively with them to help drive change.
We know we are not yet on track to meet this target, due in part to recent changes in our Strategic Asset Allocation. We are therefore adopting a “watching brief” on this target and will revisit annually in light of the wider net zero and sustainability objectives of the Fund.
2https://www.un.org/en/climatechange/net-zero-coalition
We will not invest in new fossil fuel investments in private markets unless there is a viable Paris aligned transition plan.
Private market investments are long-term investments that cannot be sold readily without incurring significant costs.
There are clear financial risks and opportunity costs in tying up our investments in assets which could be stranded, especially given the agreement at COP 28 to transition away from fossil fuels. Instead, in private markets, we want to focus investment on direct ownership in industries which are fit for the future and aligned with the Paris Agreement.
The exception to this may be in energy transition funds in private markets aimed at transitioning fossil fuels to a low carbon economy. An example of this may be helping the move from fossil fuel district heating to renewable based district heating.
For the EAPF to invest, the private market fund would need to demonstrate that the investment has a viable Paris aligned transition plan within the lifetime of our investment, either through a recognised standard like Science Based Targets Initiative (SBTi), data from Transition Pathway Initiative or independent verification.
In these instances, we will seek assurance from asset managers that this commitment be included in side letters to contracts.
Our position on divestment
Our approach is a positive approach – it is about tilting towards more sustainable investments.
It is not about divesting from all carbon-heavy investments. This would reduce the number of companies we can invest in, ignores the potential for companies to amend their business model and generally fails to manage the climate change risk in the supply chain.
That said parts of the portfolio are subject to exclusions, for example, Brunel’s Paris-Aligned Passive portfolio restricts investments to fossil fuels based on certain revenues and excludes outright Pure play Coal, Pure play Tar sands, controversial weapons and tobacco producers.
The emissions reduction pathway for a business will differ from company to company, from sector to sector and from one asset class to another.
This is why we will use scientific evidence and why we will use organisations such as the Transition Pathway Initiative that independently assess company pathways to net zero, based on a sectoral approach, to assess what is reasonable to expect.
Investing in climate solutions can sometimes mean investing in carbon intensive industries, for example hard to abate sectors such as steel are essential to many renewable energy solutions. This may result in our carbon emissions fluctuating in the short term, but delivering lower emissions for society in the longer-term.
To drive change we generally believe in engaging with companies, voting at AGMs and co-filing shareholder resolutions. Where this proves ineffective however, we support actions as shown on the following pages.
In listed markets, we support our asset managers selectively divesting from individual companies which are clearly not on track to meet the Paris Agreement
If after engagement with a company we’re unhappy with the scale and pace of change and believe material climate risk remains, we support selective divestment.
The Brunel Pension Partnership also supports selective divestment and is incrementally increasing its expectations on companies. The criteria for identifying controversial companies is agreed annually with clients.
We fully support the strong data-based approach being applied. We will be a strong proponent in the partnership for ramping up the pressure. We will also welcome any excluded companies back into our portfolio if the data shows that they have changed and become aligned to Paris.
If we hold the controversial companies identified by Brunel with other asset managers, we will share the publicly-available data with other asset managers to highlight the climate risk they present.
We support our asset managers in selectively divesting from sectors which clearly present a climate risk
Some economic activities in certain sectors are less able to transition to a lower carbon model and present us with a clear financial risk. This is increasingly the case post COP 26, where the United Nations agreed to transition away from fossil fuels.
We support our asset managers actively divesting from pure play thermal coal and oil sands extraction companies.
We believe these sectors are unable to transition in line with the Paris Agreement and if we held these assets they may suffer premature write-downs and even become obsolete due to changes in policy or consumer behaviour.
Due to the tilt of our investments, we are unlikely to be exposed to these companies but we will work with our partners to agree, and keep under review, a revenue threshold as low as possible to manage any potential stranded asset risk.
Where there are sectors which are clearly not aligned but we think there is an ability to align, we would like asset managers to prioritise these for engagement, using guidance from organisations such as the Transition Plan Taskforce, TPI and SBTi to inform discussions.
We also want asset managers to engage with companies involved in activities which we think may be unsustainable but for which currently data is not available, for example deep sea mining and artic oil and gas production.
We see these activities as incompatible with the ‘Do No Significant Harm’ principle.
While not directly focused on decarbonisation but which form part of climate transition benchmarks, we also support working through the Brunel Pension Partnership to seek to selectively divest from:
Controversial weapons and Non-Compliance with Principle 2 of UN Global Compact on Human Rights; and
Tobacco
As the decade progresses, we would support asset managers ratcheting up exclusions of sectors which are unable to transition to a low carbon business model, in line with finance risk.
This may include supporting lower carbon sleeves within portfolios to achieve our 2030 target.
We deny debt to companies which are not Paris aligned
An estimated 90% of fossil fuel external funding comes from debt finance3. Approximately one fifth of our asset allocation is invested in lending money to companies.
We do not want to lend money to companies that are not Paris aligned, unless there is a covenant in place that the capital is used expressly to help them transition to a lower carbon economy.
We have seen great strides in this area in one portfolio offered through Brunel and will be pushing for ever increasing ESG screening and engagement by all of our bond asset managers.
3Op-Ed: How U.S. banks loans and debt finance fuel emissions and climate change - Los Angeles Times (latimes.com)
We do not rely on carbon offsets to get to net zero by 2045
Our focus is on decarbonisation, not offsetting.
Some companies which we invest in may offset and some companies may sell carbon credits to help others offset their emissions.
Where offsetting is used by asset managers or companies, we think this should be after all other decarbonisation efforts have been exhausted and they should use proven solutions which are clean, viable and validated independently.
We expect all our managers to consider nature as well as climate riskOur approach to net zero is not just about mitigating climate change.
We want all our asset managers to consider nature risk and the risk of a warming climate on the assets in our portfolios.
We want asset managers to consider these risks from a double materiality perspective – to consider the risks on the company, and the risks from the company.
We are invested in a passive Paris Aligned listed equity portfolio and a quant sustainable equities portfolio.
We will work with asset managers of these portfolios to try to include a nature tilt into the selection criteria of the underlying companies.
Finally, we want all of our asset managers to have a nature-related policy including deforestation where relevant to business activities, and we want them to ask this of the underlying companies they invest in too.
How we will measure progress
We use a respected investor framework to assess our progress to net zero and have been extending our analysis to include more portfolios each year. This now includes private markets, listed equites, global bonds, multi asset credit and liability driven assessment.
In our public reports, we will publish:
Our progress towards our net zero target, including carbon footprint and how well aligned our carbon-intensive companies are to a lower carbon economy
The Top 10 highest carbon emitters in our listed portfolios.
The watchlist of 10 companies which may present the most nature risk to the EAPF.
We will seek to include Scope 3 emissions in monitoring and target setting. Scope 3 data is still often not used in company reports and some of our managers model this data instead.
The lack of scope 3 data can skew both the net zero progress of both individual companies and our overall progress towards net zero.
Scope 4 data on avoided emissions is particularly important for us to understand the true impact of our investments in climate solutions.
Data on scope 4 and recognised methodologies for reporting are not yet developed. Without these guidelines there is a risk that avoided emissions could be used as a way to greenwash.
That is why we support the work of the World Business Council for Sustainable Development (WBCSD) to identify the guidance needed for the finance sector4.
4Accelerating decarbonization by aligning the efforts of business and finance – WBCSD
Going forward we need to work with industry partners to develop guidance and methodologies that help us identify best practice reporting so that we can compare avoided emissions fairly.
We have been an early adopter of TNFD to assess our nature risk. This framework, and that for carbon (TCFD) will continue to inform our approach.
We will use the data we generate to help us prioritise where we need to engage and we will be open about what we have done and whether there has been any progress.
We will also work through the LGA and Brunel to help develop a scenario analysis which incorporates tipping points and feedback loops.
This will give us a better understanding of future financial impacts and allow us to report more effectively on the climate and nature risks we face.
