Elizabeth Fernando: Small steps and investor collaboration will help deliver net-zero targets
Nest deputy CIO Elizabeth Fernando talks to Stephanie Baxter. The National Employment Savings Trust (Nest), the largest UK pension scheme with 9 million savers, was one of the country’s first private sector pension funds to commit to a net-zero greenhouse gas emissions target.
Its policy, announced in 2020, aims to align Nest with the Paris Agreement goals to keep global temperature rises within 1.5°C above pre-industrial levels by 2050. The master trust’s goal is to be net-zero across its investments by 2050 or earlier and expects carbon emissions in its portfolio to halve by 2030.
Many pension schemes and corporates have now adopted net-zero targets, but Nest’s deputy chief investment officer Elizabeth Fernando is concerned that it has “almost become fashionable” to set a net-zero target.
Need credible plans to deliver net-zero targets
Some institutional investors are setting targets without working out how to get there, she says, adding there’s a concern that corporates are doing this too.
“There is a worry that companies are setting targets because they feel they must and most of them don't have a credible plan as to how they're going to deliver,” she says.
She firmly believes that the net-zero targets of both investors and corporates need to be followed up with short-term steps to help move economies towards a more sustainable footing.
In 2020, Nest decided to ban investments in any companies involved in coal mining, oil from tar sands and arctic drilling. But it generally advocates voting and engaging with carbon-intensive companies to drive change rather than full divestment.
Fernando says we need to see changes in the way businesses operate and how they conduct themselves in order to create change in behaviours and the economy.
“We're very nervous about people who are setting targets for portfolios and the way they get there is by selling investments – because if you do that, nothing changes,” she adds.
“We are a universal owner so we do need to see societal change to deliver net zero and at some point, we probably will need some offsets because net zero isn’t absolute zero emissions. There will be some emissions that will continue.”
Nest’s approach is around engagement and stewardship, through exercising pressure on external fund managers and engaging directly with investee companies. The master trust also collaborates with other investors through Climate Action 100 and the Net-Zero Asset Owners Alliance.
“You need to club together because it's more efficient for the companies as well as for us to do that,” explains Fernando. “It's about getting the boards to take this seriously, to be thinking they need to be setting targets in their strategies, and then providing us metrics where we can hold them to account. Ideally, you'd have remuneration and incentives linked to it because nothing focuses the mind quite like it.”
She thinks governments could do more to create the right incentives as she believes money is where the power is. The most obvious incentive is putting a price on carbon, but also on other environmental assets that matter, and making sure they are priced appropriately.
Setting up incentives to help people with the transition is also important because this needs to be a just transition, she adds: “[There is a risk] people get left behind – they can't afford to keep up with new technologies and petrol prices going up.”
Nest is looking at how it can potentially redesign some strategies so that thinking about net zero and the energy transition is more baked into the starting point that the manager is working on – particularly in emerging markets that may be less well-positioned for the transition than developed markets.
“Some markets really are at risk of physical climate damage,” says Fernando. “If they don’t have strong governance and institutions or credible net-zero plans, maybe that's not the best place to put your money. So, we're trying to think about this problem a bit more broadly.”
Make baby steps towards net zero
For those institutional investors that are very nervous about making ambitious net-zero commitments, Fernando points out that even baby steps cumulatively make a huge difference:
“A 50% reduction by 2040 or 2030 sounds terrifying but it isn’t so terrifying when you do it in little bits, and it’s amazing how much the index’s carbon footprint is already falling by.
“Investors should also ask questions of their managers and the companies they’re invested in because that's the only way we will really uncover how much is really being done, and then you can start holding people to account.”