The story behind our 15bn re-allocation and what does climate-aware actually mean

In the investment landscape, the ascendancy of index funds has been nothing short of remarkable. Over the past decade, these funds have seen an unprecedented surge in popularity, with trillions of dollars now being allocated based on indices curated by key providers. This shift has brought about significant benefits for investors, offering diversified portfolios spanning thousands of companies worldwide at minimal cost.

Traditionally, popular indices use market capitalisation to weight each stock, a strategy generally deemed sensible and that we believe in as a reasonable starting point. However, as the world grapples with complex, long-term issues like climate change, market prices alone may not fully encapsulate all such challenges. This realisation prompted the emergence of climate-aware indices, designed to incorporate other data into index weighting decisions.

The Evolution of Climate-Aware Indices

Since around 2015, investment indices and products integrating climate-related data have become increasingly available. Early approaches involved exclusions based on ESG criteria, and inclusion of data like carbon emissions. We invested in a multifactor ESG fund in 2018 and reviewed our exclusions in 2021.

Over time, more sophisticated methods have emerged, integrating climate considerations directly into index construction in a way that changes over time. These indices, often termed “climate-aware,” go beyond just using market weights, by also adding additional data points deemed pertinent to climate risk assessment.

Unlike conventional indices, which may continue allocating capital to companies exacerbating climate change, and vulnerable to the risks of sudden changes in regulation, climate-aware indices upweight allocations to companies better positioned for the transition to a lower-carbon economy. For example, by factoring in company targets for achieving net-zero emissions.

It’s not in my view entirely right to characterise conventional indices as “climate-unaware” though, they are “aware” of any issue to the extent it is incorporated into market prices.

Our recent changes

Fast forward to 2024 and it’s not overstating the fact to say that our recent announcement that we moved £15 billion of assets into these climate aware investment strategies was a significant moment for The People’s Pension.

It was something that the team I joined in September 2023 had already been working hard towards for 18 months. There was a huge amount of work in the background assessing different index approaches and providers and a range of possibilities and portfolios were presented.

The new investment approach is designed to adjust the level of investment in companies based upon their exposure to climate risks and opportunities, and tracks regional indices, which aim to exceed the minimum standards of the European Union’s Climate Transition Benchmark (“CTB”). This means it will have at least a 30 per cent reduction in emissions initially and will further reduce by 7 per cent each year, to be aligned with the target of reaching Net Zero by 2050.

The primary aim of the change is to manage the long-term risks posed to members’ investments by climate change and a green transition, that maybe aren’t currently being priced by the market.

It also means that our members can be confident their investments are working toward the goals of the Paris Agreement, rather than against it.

Key to our investment philosophy is conviction in what we do – if we really believe in something, we want to make it core to our members’ retirement savings, rather than a tick to a box, and that’s what we’ve done here, with 70% of the assets in our main investment fund falling under this approach (of the remaining 30%, almost all of that is in emerging markets and bonds where similar approaches are less well-established).

I believe that what we announced at the beginning of March means that The People’s Pension, which manages more than £25 billion of members’ assets, is now one of the greenest master trusts in the UK, which is great news for our members.

Asset owners like us are uniquely positioned to use our size and influence to ensure our members’ savings are allocated and managed responsibly, and that the companies in which we invest are acting in responsible and sustainable ways.