James Monk: FutureWise is creating a ‘different philosophy’ for decarbonisation

£11bn FutureWise, Fidelity International’s UK based defined contribution (DC) workplace pension scheme, has committed to achieving net zero by 2050, whilst also halving its emissions by 2030. 

However, unlike some DC pension providers, who have opted to decarbonise their portfolios through carbon tilting and investing in climate solutions offered through private markets, FutureWise has chosen a “different philosophy” to reach net zero. 

This "philosophy" is through implementing a carbon budget for each asset class to achieve Futurewise's net zero goals, explains James Monk, investment director for workplace investing at Fidelity master trust.

This carbon budget is progressively reducing the emissions of each of FutureWise's asset classes in line with the Paris Climate Accord. Rather than cutting its exposure to specific sectors, FutureWise will be working with its portfolio managers to set targets for a proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or earlier. 

“Even by doing nothing, we will achieve our net zero targets because the framework is embedded in every asset class we are accessing,” argues Monk.

Carbon budget

One reason for the implementation of a carbon budget is the belief that carbon tilting can lead to sector concentration and portfolio distortion based on “non financially material factors”, says Monk.

“For example, coming out of energy or being underweighted in energy and perhaps going into technology, in the context of the last two or three years, that's been a really terrible decision.

“This is because energy prices have been high and from a technology standpoint, as base rates have come upwards there's been higher borrowing costs and it has been more difficult to fund that growth trajectory,” he argues.

Therefore, in implementing a carbon budget we have been very “cognisant” of that trend, making sure that we achieve our net zero targets, “but not letting that drive the portfolio”.

Monk goes onto explain that Fidelity also uses an ESG rating process to access companies within its portfolios, which prevents sector distortion.

According to Fidelity master trust’s most recent TCFD report, FutureWise’s carbon footprint fell from 99.8 CO2e t/£1m invested in 2020 to 38.5 CO2e t/£1m invested in 2022, with Monk reiterating that the scheme is on track to meeting its net zero targets.

Overall, Monk highlights that this underlines a 61.4% reduction in carbon footprint. 

Private markets

Another way that some DC trusts are trying to deliver meaningful impact when it comes to tackling the consequences of climate change is through investing in unlisted assets, such as renewable infrastructure.

Investment into private markets has been heavily pushed by the UK government, with chancellor Jeremy Hunt’s Mansion House reforms prompting DC funds to allocate of up to 5% of assets in their default funds to unlisted equities by 2030.

Eleven UK DC master trusts have now signed up to the Mansion House Compact, however Fidelity master trust was not one of those.

Monk, speaking on behalf of Futurewise, explains that Fidelity did not sign up the compact as the scheme felt “it was constraining the best way to access private markets or private assets”.

Futurewise does not currently have any investments in private markets, however Monk explains that the scheme is “keen to explore those opportunities”. He argues that Fidelity’s reasoning behind this is due to the different challenges accessing private markets provokes. 

Monk says: "Fidelity is keen to explore these asset classes and the diversification benefits of private equity, real estate, infrastructure, private credit offers, but also are cognisant of the higher transaction costs associated with entering or exiting these asset classes, so are keen to ensure the best long term approach to these asset classes that will drive better outcomes. 

“The journey that we're going through at the moment is to try and understand how employers and consultants will view private markets and to understand where best to access the value of these different markets themselves. So, we have a number of plans that we hope to implement in the future but they are still under discussion.

“So, when you do it, you want to do it in line with your longer term philosophy,” Monk adds.

Adding to these points, Monk highlights that the fund is not invested in carbon offsets and is instead focused on “cutting its emissions”.

Engagement

In terms of Futerwise's stewardship of portfolio companies’ net zero transition, its managers, which include Fidelity International and BlackRock, perform the engagement on behalf of the DC scheme.

Commenting on this, Monk says that in terms of monitoring of Blackrock’s engagement it has “a very strategic partnership with them and we do monitor their engagement and voting ethos”.

However, he stated that even with Blackrock’s components of FutureWise, its exclusion policy is consistent throughout the entire strategy.

These exclusions include companies which derive more than 5% of their revenue from certain carbon heavy activities such as thermal coal and oil sands. Also, it excludes companies that have violated the United Nations Global Compact Principles, Fidelity country exclusions (including Russia and Belarus), controversial weapons, tobacco manufacturers and tobacco distributors up to a 5% revenue threshold as well.