UK’s largest private pension scheme to allocate $6.4B of AUM to hitting net-zero targets

The news: The Universities Superannuation Scheme’s (USS) investment management arm announced £5 billion ($6.4 billion) of its £82 billion ($110.62 billion) assets under management (AUM) will now have a climate tilt. The USS is the UK’s largest private pension scheme, provided by staff of UK higher education institutions.

More on this: The USS announced its net-zero 2050 target in May last year—and is shifting £5 billion ($6.75 billion) of its global developed markets’ equity allocation to its new climate index to help accomplish this.

• The USS developed its climate transition benchmark with index provider Solactive and it will be managed by Legal & General Investment Management.
• The climate transition benchmark will screen out from the portfolio the companies that rank poorly on the four UN Sustainable Development Goals related to climate change.
• And it will include companies that can show a roadmap for lowering greenhouse gas emissions and meeting decarbonization targets.
• The USS said that it will reduce portfolio greenhouse gas emissions by around 30% relative to the broad equity market and decrease carbon intensity by a further 7% each year.
• Crucially, the index will include Scope 1, 2, and 3 emissions: Scope 1 and 2 relate to direct emissions, and 3 includes indirect emissions from companies’ supply chains, for example, which are four times as significant.
• Oil giant Exxon Mobil came under fire for excluding Scope 3—its biggest source of carbon emissions—from its net-zero ambitions.

Why does this matter? Pension schemes can play a significant role in meeting global climate change targets. But the absence of a common global ESG taxonomy creates data inconsistencies that make it difficult for investment managers to assess the sustainability of companies within their portfolios. B2B fintechs can help address this problem.

• Investment managers play a critical role in allocating capital to sustainable projects—and pension schemes make up the largest group of institutional investors, managing $35 trillion as of 2020.
• Yet the lack of common global definitions of sustainable activities creates inconsistencies across the ratings companies receive from providers and consequently, in fund managers’ portfolios.
• This increases the risk of greenwashing, which could cause investor confidence to plummet, diverting away capital from critical sustainable projects.
• Fintechs can give investment managers analytical capabilities that help them to screen companies against various benchmarks, identify common factors, and develop their own ratings.
• UK-based fintech Forefront Future’s investment screening solution, which ascertains if companies meet customizable and complex ESG metric standards, is one example.