USS on alternative assets’ evolving understanding of climate issues

David Russell, head of responsible investment at the UK's biggest private pension, discusses how the industry is reacting to climate change.

USS has been assessing climate-related risks and opportunities for almost 20 years, how has your interaction with GPs changed?

David Russell

In very basic terms the conversation has shifted from, “Do you know what climate change is?” to, “How are you assessing  and managing this risk (or opportunity) for your assets?”

GPs are now well-aware of what climate change is – you can’t fail to see it in global media – and are increasingly assessing what it means for their assets.

There is clearly variation in how material the issue is for GPs, depending on the market segment, underlying sector exposure and regional policy differences. However, awareness is now significantly higher than even a few years ago.

Across the breadth of environmental, social and governance topics, where do you rank climate change in importance?

Although GPs and their underlying assets will be exposed to a range of ESG issues, climate change and the policy response will impact a range of sectors and how companies are managed. As a result, climate change usually ranks quite high as an issue we focus on in our private equity investments.

Around 70 percent of our private markets investments are done directly. Here we hold ourselves to the same high standards.

Given climate change is such a complex topic, what are your priorities for GPs?

They are GP and asset specific. However, at a high level, our priorities will be gathering more data on climate exposure and the management of it, from our GPs.

This is because by 2022, large UK asset owners must be reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures. The TCFD requires all UK listed companies and large asset owners, such as USS, to report on their climate-related financial risks and, as it applies to all asset classes, data gathering will be a top priority going forward. That also includes any of our direct investments.

“The vast majority of GPs simply don’t collect this data, but we are beginning to see a change”

How do you communicate these priorities to external managers?

Where it’s relevant, we ask GPs about climate-related risks during our fund due diligence. We also ask them how they manage these risks during face-to-face monitoring meetings, where we also spend time highlighting the requirements of TCFD reporting.

What detail, facts or other information do you ask prospective and existing GPs to report on climate-related issues or opportunities?

We are interested in how GPs are identifying climate- and other ESG-related risks and opportunities in both their pre-investment due diligence and their post-investment monitoring and management.

Exactly what we ask will vary depending on the industry or sector being invested in. What is relevant for real estate will be different to an oil and gas company.

In the former we’ll be interested, for example, in how the company is improving energy efficiency, reducing water usage and managing flood risk.

In the latter we’d be asking about issues such as: measuring and reducing emissions from production facilities or leakage from pipelines; the impact of carbon pricing on demand; and how they are responding to climate-related policy risk.

How easy is it to get carbon footprint data from GPs?

It is quite difficult. The vast majority of GPs simply do not collect this data, but we are beginning to see a change in this. Leading GPs have, or are now beginning, to collect appropriate carbon footprint data.

However, footprinting is just one aspect of managing climate risk – it tells you where you have been, not where you are going. We encourage our managers to think more broadly in their assessment and management of this issue.