Transition Pathway Initiative

Enhancing long-term investment decision-making

Liz Fernando, USS

USS Investment Management is the in house manager for the Universities Superannuation Scheme, one of the UK’s largest pension schemes.  Of USS’s ~ £60bn in assets, approximately £24bn is invested in public equities.  The vast majority of this is managed actively:  a team of analysts and fund managers choose the individual stocks in which we invest.

As an active manager, we want to invest in companies where we have confidence in management to deliver a business model which is sustainable in the long term. This is an integral part of how we manage risk and central to how we deliver on our pensions promise.  To make better investment decisions we need information about how the companies in which we could or do invest are managing all the material issues they face, and given our long time horizon this includes climate change.

For any Board of directors overseeing a business which is expecting to remain in existence for the foreseeable future, the effective management of environmental, social and governance issues, including climate change is an unavoidable part of a company’s licence to operate. We believe good management of these issues will drive better long term returns.  More specifically, we expect companies to have a clear strategy aligned to the business objectives, clear KPIs to monitor the delivery of that strategy, and good reporting of what they are doing so that those outside the business can monitor progress. We proactively vote to support such disclosure.

Notwithstanding recent events in the US we expect most countries to uphold their pledges under the Paris Agreement. Delivering these commitments will require changes in public policy and in regulation i.e. the cost and terms of doing business will change over time. Managing the transition to a low carbon economy should therefore be on corporate agendas.

As a result, we are proud to be a supporter of the TPI.  It will provide us with information on management quality and on performance, allowing us to assess companies’ exposure to carbon and climate change risk and their management of that risk.  At USS we will use the information to both inform investment decisions, and as a basis for our stewardship strategies with companies, either individually or in collaboration with other investors.  The simple-to-follow escalation process provides specific improvements to ask for, and a mechanism to track the success of engagement.