USS Investment: GPs providing ESG data ‘will be the norm’

The UK’s largest private pension scheme is divesting from certain sectors in its bid to invest responsibly for the long term. David Russell, head of responsible investment at USS Investment Management, explains why.

David Russell
David Russell

It’s been almost a year since your joint statement with GPIF and CalSTRS calling for a greater focus on long-term sustainability-related risks. What kind of response has this had?

Since March 2020, an additional 12 global funds have joined as co-signatories to ‘our partnership for sustainable capital markets’ statement. It is for each signatory to decide how to respond to address the challenges and opportunities highlighted in the statement. For our part, we hope that the support for the statement will send a strong signal to the market that asset owners now see long-term sustainability risks as a core component of investment and stewardship processes.

How does USS engage with external managers to drive climate action?

USS has a detailed ESG monitoring process which includes questions around how a manager is managing climate change-related issues. These will of course vary in relevance depending on the sectors and type of companies in which the GP is investing, but we expect all managers to consider what the impacts of a changing climate, and climate-related regulation, will have on their assets. As part of our monitoring programme, we review private equity portfolios to identify assets where climate change (either physical risks or transition risks) may be present and ask the GP how these are being managed.

What progress has been made over 2020 and what are your responsible investment aspirations?

Notwithstanding the issues associated with covid-19, we believe ESG issues in general, and climate change in particular, have continued to move up the agenda of private equity managers. Increasing numbers of GPs now routinely provide ESG data in standard fund documentation, including information around climate change related issues: we believe this will be the norm going forward.

During 2020, USS Investment Management itself made some major strides forward in its recognition of the growing importance of ESG and regulatory pressures on the portfolio, and as a result announced plans to exclude and, where necessary, divest from companies in those sectors that were deemed to be financially unsuitable over the long term. These were: tobacco manufacturing; thermal coal mining, specifically where this makes up more than 25 percent of revenues; and controversial weapons – companies that may have ties to cluster munitions, white phosphorus-based weapons and anti-personnel mines.

The burning of coal, in particular, has a significant impact on climate change. With a focus on reductions in emissions and a decrease in the cost of alternatives, it is likely that markets have failed to value adequately the potential risks coal mining companies face. This in turn will lead to pricing pressure. This cannot be mitigated by engagement, hence our decision to divest.

Over the next two years, if not earlier, USS Investment Management will cease investing the scheme’s assets in companies in these sectors and begin to fully divest of any such companies where we have investments we can control. These exclusions will be kept under review and may be changed or added to over time and will be made across the defined benefit and defined contribution sections.