Partners in Confidence: Helping define a policy away from fossil fuel investments

Partners in Confidence – Consulting on net-zero driven investment portfolios

The Client: Semi-public sector department 

Understanding the client challenge

The client was reviewing its total assets under management, in particular its pension scheme; as a sponsoring employer and government body, it was keen to adjust its “green” objectives. 

The science and evidence underpinning global concerns surrounding climate change is concrete. Pension schemes, as a proportion of total assets under management, account for the majority of the institutional investment market and therefore have a key role to play in the fight against climate change, through the responsible allocation of capital and stewardship. 

The single biggest contributor to climate change is emissions from fossil fuels. When fossil fuels are burned, they release large amounts of carbon dioxide, a greenhouse gas, into the air. Many commentators believe that in order to halt the impending effects of climate change, and to limit global temperature rises to 1.5 degrees Celsius, it is crucial that investment in fossil fuel companies is reduced and capital is allocated to ‘greener’ companies i.e. those that do less harm to the natural environment. 

In light of these concerns, a trustee board approached Quantum Advisory to help them define a clear policy on fossil fuel investments and to help mitigate some of the risk that climate change poses to the scheme’s investments.  

Providing a big name service on a first name basis

Working with the trustees, Quantum's investment team provided training on the history of responsible investing and the various approaches that can be adopted. This helped the trustees to set their objectives and focus on their core beliefs.  The Quantum investment team 

• Reviewed the scheme’s existing direct investments and third-party investment managers and looked at alternative options for implementing the scheme’s strategy. 
• Provided information on products available which could help the trustees meet their objectives.
• Designed a robust policy to manage the scheme’s level of fossil fuel exposure. The policy is aimed at reducing its investments in the global fossil fuel industry over a 5 year period. 

The following changes were implemented immediately:

• The existing equity fund, which had no specific ESG criteria, was replaced with an equity fund that  explicitly incorporates ESG considerations and makes use of exclusionary measures.
• The existing multi-asset fund, which had a significant direct exposure to fossil fuels, was replaced with an alternative which has been specifically designed to address key ESG factors, with no direct exposure to the oil & gas industry.

Client impact

• The scheme’s overall direct exposure fell by over a third in year one and continues to fall as further changes to the strategy are implemented.
• Performance has remained strong and the risk characteristics of the portfolio remain comparable to the original portfolio. 
• Quantum Advisory continues to work with the trustee board to monitor the scheme’s exposure and identify areas that can be improved upon further, where possible.