Nest has set out plans to move to its default pension strategy towards a net-zero investment portfolio by 2050, with at least £5.5bn of equities pledged to climate aware strategies.
As part of a fresh portfolio-wide climate change policy, the £12bn master trust said 45% of its entire portfolio would soon be moved into investments with a lower carbon footprint to complete the equivalent of taking 200,000 cars off the road.
It will also divest fully from companies involved in thermal coal, oil sands, and arctic drilling by 2025, unless they have plans to phase out all related activity by 2030.
The defined contribution (DC) scheme wants to halve its carbon emissions by 2030, asking fund managers to analyse what impact this will have on its portfolio, and will require its fund managers to make progress against this and other benchmarks.
Investees will also be actively pressured to align with the goals of the Paris climate agreement with the threat of complete divestment if little progress is shown following sustained engagement.
Nest chief investment officer Mark Fawcett said the move was a "significant step", adding: "Over the coming decades, climate change is going to be one of the world's biggest challenges. It poses a significant threat to not just the environment, but economic stability. Our members don't want to save and then retire into a world devastated by climate change."
The move is one of the biggest shifts by a UK pension scheme away from carbon intensive industries and follows research that found 65% of pension savers believed their funds should be invested in a way that reduces the impact of climate change. Yet, just 1% made a change to their investment allocation in the last year to reflect this.
Nest said the research showed that pension schemes had a responsibility to put tackling climate change at the heart of their default strategies, rather than expecting consumers to make the changes themselves.
The master trust said it would phase its divestment from businesses involved in thermal coal, oil sands and arctic drilling, beginning at the end of this year for companies with more than 20% of revenues derived from these activities. This will be followed in 2023 by those with more than 10%, and in 2025 by any company with activity in these assets, unless they have committed to a full phase-out by 2030.
Head of responsible investment Diandra Soobiah said: "It is a phased approach we are taking. This gives us time to engage those companies and understand how they will be transitioning. We know that through our engagement, a lot of companies, particularly in utilities, are in the transition.
"We don't want to penalise those companies that are transitioning to renewables that still have legacy coal, but are committed to decommissioning those assets in a responsible manner. We do feel that by 2030 if companies are still in these types of activities, we doubt the extent to which they're planning to transition."
‘Short shelf life'
Nest said it had not given up on its engagement approach but recognised that some companies were failing to take action. Engagement has led to some companies setting carbon reduction targets, and aiming to be net-zero by 2050, Soobiah said.
"Engagement does heed results. However, there are some companies that aren't meeting some minimum expectations such as reporting."
She continued: "Where companies aren't even making the basic level of commitments we are expecting, we will consider divesting. That's after more engagement and voting. We aren't just going to give up but there will come a point… that we might think about divesting."
These assets have a "quite short shelf life", she said, adding this approach could also include banks and other financial services firms: "There's no point in trying to invest into more and more of these assets for the long-term. We see short-term commitments [to these assets], but we want to see long-term plans for banks to start phasing out these kinds of activities."
Companies' progress will be measured against a number of objectives in Nest, which in turn may differ based on sector or geography, recognising they may be starting at different points.
Responsible investment manager Katharina Lindmeier said: "We are looking to have quite a formalised process where we will be looking to have initial meetings with companies and set objectives. Depending on where they're at, this might be simply signing up to the Task Force on Climate-Related Disclosures, or to go further and set science-based targets."
Progress will be reviewed on at least an annual basis, and the master trust will employ "escalation measures" where necessary, including direct contact with company management, using voting rights, or supporting shareholder resolutions.
She warned, that without accounting for climate change in investments, Nest members would "face a double whammy of both worse pension outcomes and a lower quality of life in retirement".
Fawcett said he hoped action would force other companies' hands: "For each success that we as asset owners have, that increases the pressure across the economy. We have reached a tipping point. For companies not to think about the environment is not acceptable. We are hopefully pushing open doors."
ShareAction campaign manager Lauren Peacock hoped the policy would encourage similar action from other pension schemes, adding: "Nest's policy acknowledges the impact of its investments on the planet and takes responsibility for them.
"By committing to engage with companies head on, all the while moving assets out of high carbon sectors, Nest is setting clear expectations for those most responsible for the climate emergency and demonstrating the power of pensions to move them along a more sustainable path. It is vital that engagement moves past disclosure and leads to meaningful change by companies if we are to curtail the climate crisis."
The policy was also celebrated by Make My Money Matter, a campaign launched this month by film producer and Comic Relief co-founder Richard Curtis to make pension assets more sustainable.
Campaign chief executive Tony Burdon said: "This is the first time a leading UK master trust, managing the pensions of over nine million British people, will ensure that its entire investment portfolio is net-zero by 2050, with an expectation of halving of emissions by 2030.
"We're delighted by Nest's leadership, but it begs it question, why Nest and not the rest? That's why Make My Money Matter is urging all UK pensions funds to match this ambition, and commit to net-zero portfolios. After all, what's the point of saving for retirement in a world on fire?"
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