PLSA exclusive: USS heavyweight on decarbonisation, renewables and biodiversity investments

As Britain's pension fund community gathers in the Scottish capital for the investment conference of the Pensions and Lifetime Savings Association (PLSA), kicking off in Edinburgh today, Net Zero Investor sits down with one of the largest vehicles in the UK.

The Universities Superannuation Scheme has close to £90 billion under management and serves more than 400,000 members, mostly active and retired academic and academic-related staff from universities established prior to 1992.

Just over two years ago, Innes McKeand, who will be speaking at the PLSA event tomorrow, was appointed to the new role of head of strategic equities at USS Investment Management, the wholly-owned investment management arm of the USS. He joined from Australian Super where he was head of equities.

In an exclusive interview with Net Zero Investor today, McKeand dives into the financials of decarbonisation and discusses investment opportunities in renewables and biodiversity. 

The London-based industry veteran also shares his take on what role asset owners, and pension funds in particular, should play in driving the net zero investment agenda.

Some here at PLSA in Edinburgh say asset owners should focus less on numbers and targets and more on 'real-world' decarbonisation. Do you agree?

I have some sympathy with this argument. There is some academic evidence that investors’ pressure to make companies increase disclosure, provide more data, has been successful – but only in producing more disclosure. While more data and targets do focus the mind, we need to be mindful of the unintended consequences. 

For example, in theory it would be relatively easy for us to sell a small number of holdings with currently high carbon emissions and in turn hit our own carbon reduction targets quickly. But is this having the impact we want at asset level, or are we just changing ownership of the assets? We need to focus more on real-world decarbonisation; but the pace of this remains frustratingly slow.

Well in order to speed up that transition, how can the government and regulators play their part in pushing the wider economy to decarbonise?

We as a pension fund will find it incredibly hard to have a net zero portfolio unless the world economy moves to net zero too; governments and regulators have a huge role to play in making this happen. We would like to see the Government be more vocal and unequivocal in its support for the transition to a low carbon future rather than divestment from high carbon assets. The transition to a low carbon future requires companies to shift their business models, which will require incentives, positive policy levers, and a wider societal shift, which Government is well-placed to help facilitate.

Reaching Net Zero is a huge challenge – it means systematically changing the energy system that has been powering the world for over 100-150 years. It’s therefore a complex undertaking requiring investors, companies, policy makers and society to work together, globally.

That means having a say, a voice?

Yes, we are a long-term advocate of the need for an investor voice in policy development because we believe engagement with policymakers and regulators on ESG and related factors, like climate change, improves how markets operate and addresses systemic risks. We also recognise that stronger markets lead to stronger economies, which strengthen the fiscal position of governments.

The transition also requires further investment into renewable energy and infrastructure, which the Government can facilitate. We need predictable, transparent, and stable regulation of infrastructure assets, and additional policies to reduce energy demand.

Can you give me an example of that?

Yes, USS was again a supporter of the 2022 Global Investor Statement, which called for clear policy frameworks that encourage capital flows towards urgent climate action. We were one of 604 signatories representing almost $42trn in AUM of a statement that was released in advance of the COP27 conference, in Egypt last year.

Let's return to the investment space for a second. Biodiversity and renewables are increasingly cited as the next frontier in net zero investments. Do you share that view?

We are already significant investors in renewables, having invested almost £2bn in that area via private markets. We are keen to add to this exposure where we can find them at attractive returns. We are universal owners, which means we own a more or less representative slice of the global economy and are therefore financially exposed to broad systemic risks affecting overall market returns that we cannot avoid by stockpicking.

Biodiversity loss and antimicrobial resistance are two of the bigger systemic risks outside of climate change which may be financially material. These are very challenging issues for individual pension funds to address so it makes sense to collaborate with other large global asset owners. A number of us are working with Cambridge University on an initiative to address these systemic risks given their potential financial impact.

How do you see the role of asset owners in influencing or steering the net zero investment agenda?

We firmly believe that focussed engagement and meaningful investor collaborations are key to stewardship success. Whilst USS is a relatively large pension fund, we are small compared to international financial markets, and our holdings in companies tend to be correspondingly small. 

Collaboration adds weight to individual company engagements and to addressing market wide systemic failures. The additional influence, the shared learning and the greater efficiency associated with collaboration means that it is a central and critical part of our approach to stewardship.

Fair enough, and if we zoom in on USS, what can you say about your own net zero achievements, so far? Are your engagement efforts paying off?

We announced our ambition for our investments to be Net Zero by 2050, if not before, in May 2021. To date, we have announced our interim targets, introduced a new climate tilt to a large slice of our equity investments, and introduced a £500m Sustainable Growth mandate. This mandate will be invested globally in high growth, private businesses that are developing technologies and services to help companies and the broader economy to decarbonise.

More recently, we have improved both our carbon emissions data and the methodology we use to calculate this, in order to build a solid foundation on which to move forward. We have also integrated climate and carbon considerations into our investment decision-making processes.

Society cannot divest its way to Net Zero and neither can we. There needs to be a transition to a low-carbon future which involves governments, individuals and companies fundamentally shifting their way of operating. This will require an enormous amount of commitment and capital investment, and we have an important role to play in driving this forward.