Universities Superannuation Scheme (USS) will divest from tobacco, coal, and controversial weapons manufacturers following “years of demand” from members and recent protests on its overall commitment to climate action.
USS - the UK's largest pension scheme with £68bn in assets - will pull its funds in tobacco manufacturing and in thermal coal mining, specifically where this makes up more than 25% of revenues.
This will take place over the next 24 months, along with a full divestment from companies involved in landmines, the production of cluster munitions, and white phosphorus.
USS said it had concluded that the traditional financial models used by the market as a whole to predict the future performance in these sectors had not taken specific risks into account. These included changing political and regulatory attitudes, and increased regulation that USS Investment Management (USSIM) have now found will damage the prospects of businesses involved in these sectors.
USS Investment Management chief executive Simon Pilcher said: "This is a major development for us, and one that will balance both keeping the financial promises made to hundreds of thousands of members in the higher education sector, with investing in a responsible way over the long-term. The exclusions we have announced today will be kept under review and may be added to over time.
"As the majority of USS's assets (around 75%) are invested directly by USSIM, we will have a great deal more control over this process than other pension schemes, and where we work with external managers, we will work diligently with them to implement our conclusions via their products."
In a statement today (1 June) ShareAction said the divestment decision showed that Pilcher "appears to be open to the types of changes long demanded by scheme members to reflect widely-held ethical preferences of people working and teaching in UK universities".
ShareAction chief executive Catherine Howard said: "It seems new leadership at USS is once again listening, which will greatly help to restore trust in USS at a time when it is badly damaged."
The lobby group said USS' portfolio allocations show it currently has around £1bn invested in fossil fuels, £400m invested in tobacco, and £200m in arms manufacturers.
Howard continued: "There is much further to go with the process and we hope USS will look now to follow other large UK schemes in establishing a robust new approach to regularly ascertain the view of members on investments held for their benefit, building members' preferences into the scheme's stewardship policy as well as taking further, bold steps to halt investment in fossil fuels."
The divestment comes after two years of USS sitting at the centre of strike action over the funding of pensions in the university sector, and a difficult period of member-driven engagement over ESG compliance, supported by ShareAction.
February saw USS outline a new methodology and investment strategy ahead of its 2020 valuation after two weeks of strikes at more than 70 universities under the umbrella of UK Universities (UUK), which monitors the scheme's sustainability. This came as part of a long-running dispute dating back to UUK's decision to effectively close the defined benefit (DB) section of USS to future accrual in 2017.
USS then continued its discussions over whether a pre-and post-retirement dual discount rate approach could help plug serious funding concerns for its DB section in March, with a formal consultation with UUK to determine the outcome of the valuation later this year.
Cardiff University's Professor Paul Kinnersley, a member of USS group Ethics for USS, said he expected "overwhelming support" from scheme members over the divestment decision.
"They do not want their pension contributions invested in sectors which accelerate climate change, kill people or cause harm to them," he said.
"We will continue to make USS aware of members' views on the need for further rapid divestment particularly from carbon intensive industries in response to the climate emergency so that they can have a pension scheme that invests ethically and that they can be proud of."
Dr Sue Blackwell, another member of Ethics for USS and formerly of the University of Birmingham, added: "Ethics for USS believes it is high time that USS acknowledged that divestment on ethical grounds by a pension fund is perfectly legal, subject to certain constraints such as consulting the members of the scheme."
USS confirmed it was committed to long-term ESG-focused investming in a joint statement with the Japanese Government Pension Investment Fund and the California State Teachers' Retirement Scheme on sustainable global growth for pension schemes earlier this year.
The statement said: "Asset managers that integrate ESG factors throughout their entire investment process vote according to the mandate to which they have pledged and are transparent with us about their level of corporate engagement; it demonstrated they are committed to long-term value creation in line with our interests. We prefer to build and maintain relationships with asset managers who fit this description over those who do not, and pledge to hold them accountable to ensure they deliver on the commitments they have made."
Asset manager Greencoat Capital has acquired the Lincolnshire-based Sleaford Renewable Energy Plant with funds from RPMI Railpen and Greencoat Renewable Income and commitments from UK corporate and Local Government Pension Scheme funds.
Over a third of investment costs faced by pension savers come from transactions, according to the latest annual research from Caceis.
In this live blog, Professional Pensions' sister title Investment Week collates all the breaking market news, analysis and opinion on equity, bond and currency movements as well as the impact of trade wars, tightening monetary policy and the Brexit negotiations....
Governments have proposed a raft of initiatives to protect businesses and their employees from the impact of the coronavirus pandemic, while banks are being used to inject liquidity into the economy – something that will have material implications for credit markets. In the latest edition of 360°, our fixed-income quarterly report, we discuss the impact of these changes and take a closer look at the structured-credit market.