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05 / 09 / 2024
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The journey to net zero
Four years on from setting a 2035 net zero goal for the BT Pension Scheme, what progress has been made and what have we learned?
In 2020 Brightwell supported the BT Pension Scheme (BTPS) Trustee Board in setting an ambitious 2035 net zero goal. The goal was tailored to the Scheme’s current portfolio and future investment plans and followed extensive research and analysis.
The Scheme set net zero by 2035 as its goal based on the fact that by 2034 virtually all members will be pensioners. As a result, the Scheme is increasingly shifting its investments towards income generating assets. This created a unique opportunity to reallocate capital on a significant scale in a relatively short period of time.
The intention was to limit the impact that climate change could have on BTPS’ long-term funding outcomes, providing greater resilience to meeting members’ promised pensions.
Getting to net zero involved both reducing emissions from the Scheme’s portfolio and investing in assets that will support the transition towards a low carbon economy
At the time of setting the goal, it was recognised that a number of external factors, largely out of our control, would be critical to achieving the ambition namely:
- The global policy evolution
- Data availability and methodology challenges
- The fact that progress in these areas would be non-linear and unpredictable
We accepted that these factors would likely hinder progress and that 2035 would be challenging but, because of the potential impact on long-term funding, we agreed that they should not be seen as a reason to delay getting started. We also recognised that having a more ambitious goal would push us to do more sooner.
We outlined a four-pillar framework to help us facilitate the goal. These were factors within our control, namely: portfolio construction; mandates and managers; stewardship; and advocacy. In addition, a governance structure was put in place to monitor and evaluate progress. We also joined the Net Zero Asset Owner Alliance to learn, collaborate and share views with like-minded peers.
What we’ve learned
Today, almost five years on from the initial work undertaken to propose the net zero goal, what have we learned? Over this period, arguably climate change has accelerated and is having more acute impact on humanity and the planet. There has been policy progress, such as the Inflation Reduction Act (IRA) in the US but climate policy remains fragmented, inconsistent across regions and lacking the coordinated global action that’s required.
Data remains a key challenge. There have been clear improvements in the breath, depth, and consistency of emissions data. However, there are many issues such as scope 3 data, methodology changes, and weak provision of data in certain asset classes – particularly private assets.
Progress on emissions at a global level has certainly been non-linear. Impacts from covid related economic shutdowns and the subsequent recovery has resulted in a bumpy journey. Progress across countries, sectors and companies has diverged, exacerbated by very different emissions management approaches taken between oil and gas companies in the US compared to Europe.
Geopolitical issues have also played an important role over the past four years. In particular the war in Ukraine shifted the policy focus away from emissions reductions to energy security, the cost of living and a more domestically focused agenda. Recently the political narrative in various election campaigns has often focused on the short-term costs of the climate transition, rather than the longer-term implications.
Progress
At a portfolio level we’ve seen decarbonisation progress ahead of the interim targets set for BTPS. This is a result of underlying companies reducing emissions, our investment managers reducing exposure to higher emitting sectors such as oil and gas, as well as portfolio reallocation effects which have resulted in reduced weights in assets such as emerging market debt and equity.
However, what’s clear is that a pragmatic and flexible approach is required. Data issues mean managing portfolios explicitly based on current metrics could result in suboptimal investment decisions. Moreover, a greater emphasis on forward-looking metrics and targets is required – otherwise we’re trying to drive forward while only looking in the rear-view mirror.
Strong collaboration with our investment managers has been an important feature of our work over the past few years. This has been mutually beneficial, and we’ve seen dramatic improvements in their systems, portfolio monitoring and reporting which has allowed for deeper dialogue, greater alignment and improved clarity around how net zero outcomes can be achieved that complement risk-return outcomes.
Another important issue that’s even clearer today is how intertwined climate change is with other sustainability themes such as natural capital and inequality.
Positively, the opportunities to add value from the transition to net zero have opened up with significant progress in the development of investment strategies and capital targeting the transition. Critically this has evolved from an almost exclusive focus on new technologies and renewables, to a wider focus that includes provision of capital to higher emitting industries that require significant investment to decarbonise. Actively allocating to this clearly helps with real world decarbonisation, albeit it can lead to short term increases in portfolio emissions. This highlights the need to measure and monitor ‘abated’ emissions and that it is important to look below the headline figures to fully understand what progress is or isn’t being made within a portfolio.
Having a net zero goal which wasn’t too far into the future meant that we had to grapple with the nuances, implications, and challenges ahead of many others. We are encouraged that despite weaker than expected top-down global policy progress – clearly hindered by covid and geo-politics – bottom-up progress by companies and investors has been far more positive.
If you are interested in finding out more about how Brightwell can develop innovative solutions for your scheme, please contact us at hello@brightwellpensions.com.
