Smart Pension’s James Lawrence on DC investment in climate solutions

 Smart Pension, the UK-based £4bn defined contribution (DC) master trust, has set an ambitious target of reaching net zero by 2040.

To get there, the pension provider ramped up its commitments at the end of last year, now aiming for a 75% reduction of its emissions in its default fund by 2030. This is due to the master trust achieving its original goal of a 50% decrease in 2022.

In an interview with Net Zero Investor, James Lawrence, head of investment proposition at Smart Pension, explains how the fund is aligning its portfolio to the 2040 benchmark.

James Lawrence will also be speaking at Net Zero Investor’s Defined Contribution Forum about investing in natural capital and nature positive solutions on 31 January. To register for the event click here. 

Renewables - new mandates

Greater allocations to climate solutions will be a key focus for the master trust this year, the fund is looking to launch a renewable infrastructure mandate in the third or fourth quarter, Lawrence says.

“We're looking at a renewable infrastructure mandate this year, which will include projects within solar, wind, transmission and energy security, supporting the green transition.

“This might have a higher carbon footprint to start with due to the cost of building projects such as wind farms in the first few years, but over the longer term should be well aligned with our 2040 goal,” Lawrence explains.

Smart Pension has a target to allocate 10% to climate solutions in its main growth fund and flagship fund, with the pension provider currently having an allocation of 7.5% to the asset class.

The master trust’s interest in renewable infrastructure comes as UK chancellor Jeremy Hunt announced his Mansion House reforms last year, which recommended that DC pension schemes allocate up to 5% of their portfolio to unlisted equities by 2030.

Currently, Smart Pension has 6% allocated to private credit and is looking to put 5% into renewable infrastructure, Lawrence states. He adds that the fund is also looking to invest 5% in private equity but acknowledges that performance fees currently pose a challenge to the ambition.

Another key obstacle for DC funds when investing in private markets, such as renewable infrastructure, is the requirement for daily pricing, with managers often only offering bi-annual or annual valuation.

However, Lawrence explains that as Smart Pension’s proposed allocation to renewables is only 5%, daily pricing is “less of a problem” as “95% of the fund is daily and accurately priced.”

“We are pretty aware that we are not going to get daily prices from them and I don’t think we want them as you don’t know what you are going to get in that daily price, it’s going to be very finger in the air.

“It looks like we have a monthly valuation and a more formal quarterly audited valuation as well. But, it will be a pretty accurate monthly valuation that will trade on. We will do something similar to what Octopus are doing with Nest currently, which has a stale price for the month until it refreshes,” Lawrence adds.

Low carbon stewardship fund

Talking to Net Zero Investor, Lawrence outlines that another way in which Smart Pension is going about achieving its 2040 net zero goal is through the introduction of its AMX-DWS low-carbon stewardship fund.

Smart Pension launched the low-carbon stewardship fund in September last year which has components such as split voting and a low-carbon equity index to help decarbonise the master trust’s portfolio.

“The new fund has got a custom index that we built and that's aligned with our 2040 net zero benchmark.

“It has also got voting rights within split voting. So, we can vote on topics at companies that don't align with our net zero goals. We're looking at aligning the rest of our investments or the rest of our equity portfolio with that benchmark this year,” Lawrence explains.

In the past, Smart Pension has found its net zero ambitions restricted by the fact that many asset managers have less ambitious targets in place. However, split voting allows the master trust to express preferences to fund managers on pooled funds.

Lawrence outlines that despite not having any updates on the fund so far, throughout 2024 Smart Pension will be taking individual votes and reviewing them.

“We're unlikely to follow the typical route of offering thousands of votes out, but we'll probably pick out a vote a quarter that we think will be really interesting for members. Do some research on it. Share that with members, discuss it with our Trustee Board, get member's views on it, and then submit our vote in line with that,” he explains.

Voting misalignment

The launch of Smart Pension's low carbon fund comes as a rising demand for stewardship options in pooled funds has started to increase among institutional investors.

When questioned on how the pension fund would act if its vote differed from its asset managers, Lawrence replies: “Our asset manager follows our policy on everything, so I don’t think we would be too misaligned.

“But there might be individual votes where we just want to take a more in depth look at the votes. So, if there's a big vote coming up at Shell, we have set a policy and we think it's likely to vote in a certain way, but we would like to do some more research and engagement with the industry to make sure our policy is in line with that vote,” he adds.

Divestment

In addition to ramping up its stewardship ambitions, Lawrence confirmed that the master trust is “firming” up a divestment policy this year.

“Part of what we're doing in moving to the [low-carbon equity] index is probably going to divest from a lot of stocks anyway because they are not aligned with us. Also, a lot of the stocks haven't really engaged particularly well,” Lawrence stated.

When asked how the fund will prevent sector concentration when tilting away from oil and gas through the alignment to a 2040 index, Lawrence suggested that this is not something that Smart Pension is necessarily worried about.

“I think by default, having something a bit punchy with net zero does tend to invest in tech sectors and I don't think we can fully get away from that. We've done quite a lot of analysis on a sector-by-sector basis, and it's a little bit overweight, but it's not significantly overweight from our perspective,” he explains.

James Lawrence will be discussing natural capital and nature positive solutions at Net Zero Investor's Defined Contribution Forum on 31 January at the London Stock Exchange. To find out more about the event, click here.