Pension fund NOW: on an unstoppable mission to colour its entire portfolio green
82% of the investment portfolio of UK workplace pension provider NOW is now considered green. CEO Patrick Luthi explains the multi-billion investor's sustainable investment approach
Many pension funds and other institutional investors received criticism recently for having a net zero strategy in name only, with some even openly embracing anti-ESG sentiments altogether, most notably in some parts of the U.S., the world's largest investment market.
High inflation, rising costs in renewables, complex regulations and uncertain macro-economic conditions are forcing a range of investors to take a more traditional approach while allocating funds, as they firmly place returns at the top of their priority list.
NOW: Pensions, however, is having none of it. The third biggest master trust in the UK, serving over 2.2 million employees, has its focus firmly on sustainable asset allocations and mitigating climate-related investment risks.
Net Zero Investor touched base with the multi-billion UK workplace pension provider as it opened itself up to full scrutiny and disclosed a host of key metrics in its investment portfolio.
The pension scheme shared fresh data with this publication which showed that its sustainable investments now make up 82% of its entire investment portfolio, a jump of 26% in just one year, as this was 56% in April 2022.
Patrick Luthi, the CEO of NOW, stressed his pension is firmly committed to reaching net zero greenhouse gas emissions by 2050, with an interim target of a 50% reduction by 2030 based on 2019 levels.
He pointed out that this is consistent with the Paris climate agreement goals of limiting global warming to 1.5°C versus pre-industrial levels.
“While the last twelve months have been a test of resolve for many on sustainability, our conviction and commitment have not changed," said Luthi, who is also the chief financial officer of Cardano, a privately-owned investment management and advisory firm which acquired NOW: Pensions in October 2019.
"As well as managing short-term risks, we are continuing to invest with our members’ long-term financial position in mind to deliver a more sustainable society," he added.
Moreover, 23 green, social, or sustainable bonds now make up over 15% of the London-based provider's portfolio, up from 13% last year.
Luthi stressed NOW remained "resolute" in the aims it set out in 2017 when the fund began investing in green bonds.
"We regularly review our investment strategy and ensure that our investments align with the three priorities of our sustainability strategy: climate action, living wages and gender equality," he continued.
In addition, NOW has introduced a new metric, which focuses on alignment to the Paris climate agreement.
The pension measured this by the percentage of assets under management within its portfolio that have science-based targets in place, as reviewed by the Science Based Targets initiative (SBTi), Luthi explained, disclosing this currently stands at 24%.
Regarding the total greenhouse gas emissions of NOW: Pensions, this is now 142,900 tons of greenhouse gas under scope 1 and 2.
Under scope 3, upstream 307,800 tons were reported, compared to 259,900 tons in 2022, and 879,500 tons for scope 3 downstream. This was 776,800 tons in 2022.
The pension also revealed its carbon footprint, namely 63.1 tons of greenhouse gas per million pounds invested for scope 1 and 2 versus 71.3 tons in 2022.
For scope 3 upstream emissions 135.9 tons were recorded, 112.5 tons in 2022, and 388.4 tons scope 3 downstream emissions. This was 336.4 tons in 2022.
"Within our investment strategy, NOW has increased its corporate physical equity investments and decreased its derivative investments," Luthi said.
"This has led to minor changes in its regional allocations. It has also made sectoral changes within the portfolio in response to wider economic pressures, such as inflation and higher interest rates."
With regards to engagement and stewardship, NOW "continues to promote an active stewardship role," Luthi said.
Earlier this year, the pension fund implemented a stand-alone stewardship policy.
"It helps to ensure the responsible oversight of the companies we invests in. We actively engage with companies to support – and if necessary, require – them to transition to a lower-carbon business model," Luthi stressed.
"We believe that this active approach is more effective to serve the best interests of members than disinvesting from less sustainable companies," the chief executive explained.
Finally, NOW introduced a decarbonisation framework over the last year, in conjunction with its investment manager and owner Cardano.
"The framework monitors progress to reduce the emissions in the business’ investment portfolio and the wider economy. NOW actively reviews this via its investment allocations to help meet its ambitious decarbonisation targets," said Joanne Segers, chair of the board of trustees.
She shared that "the introduction of our decarbonisation framework has allowed us to increase the alignment of our investments with clear sustainability objectives."
Segers added that "this means we are on track to hit our goal of reducing the level of greenhouse gas emissions within our portfolio by 50% by 2030."
“We know this is an important issue for our members too. Earlier this year we carried out a series of focus groups with members and employers to better understand their views on sustainability.
She went on to say that “the results showed an increasing awareness of corporate social responsibility and ESG. Some members felt that some investments are morally wrong, such as specific products like weapons and tobacco, but also recognised that divesting from fossil fuels is not always straightforward.
“A key learning, and next step for NOW: Pensions, is to consider improvements on how the scheme and industry more broadly can improve communicating responsible investment to members and employers," Segers concluded.