The pensions industry has long been responsible for investing in and financing businesses and industries that have caused catastrophic damage to the climate. On average a pension pot in the UK finances 23 tonnes of CO2e emissions each and every year. To put that into context, the average Brit, in their day-to-day life, produces between six and ten tonnes of CO2e a year.
Cushon announced the launch of its low-carbon investment strategy, to support its net zero proposition a year or so ago. Part of our value proposition to acquire master trusts (MTs) is radical reductions in their carbon footprints. This year we have already reduced the carbon footprint of the Salvus MT by more than 40 per cent or the equivalent of more than 11,000 tons of CO2e each year. With the transition of two further MTs in 2023, we will achieve additional reductions of more than 40, 000 tons of CO2e each year.
While other MTs are committing to net zero in 2050 and halving emissions by 2030, Cushon believes that what is most important is to take action now. Consequently, Cushon has structured its global equity exposure to deliver an immediate emissions reduction of at least 60 per cent, shifting the debate about what is possible today.
But some trustees, and indeed advisers, will argue that they should, at least for the time being, stick with oil, coal and gas that have so reliably provided dividends for pension funds over the years. Moral and sustainability arguments aside, are current conditions proving them right?
Oil stocks have been one of the few positive investment stories of the last year – the war in Ukraine has pushed fossil fuel prices higher resulting in returns of 50 per cent on indices tracking the energy sector over the past year. Expansion of fossil fuels is back on the agenda. It’s not been the ideal time to launch an index that significantly underweights oil and gas.
So, the question posed is, have Cushon’s trustees been forced to choose between sustainability and return?
The index chart shows that Cushon’s bespoke equity index successfully delivers returns in line with a globally diversified market capitalisation weighted index. While the negligible exposure to fossil fuel companies led to a slight underperformance around the invasion of Ukraine, the extreme outperformance of oil and gas companies since is largely neutralised by increased exposure to more sustainable sectors, e.g., healthcare. A globally diversified equity portfolio can be optimised both for sustainability and return.
We will inevitably encounter periods when positive impact and returns aren’t so well aligned, and fiduciaries need to be clear about how they target long-term objectives about the environment they want their members to retire into when short term bumps in the road arise.
Cushon has demonstrated that a well- designed index can make reconciling the two a great deal less challenging, but we need to go further. Investment strategies that are positively correlated to the price of carbon while delivering climate benefits are the next objective. Looking forwards, Cushon is excited by the investment opportunities that the climate transition presents.