ESG: Major UK beneficial owner publishes sector-exclusion list
03 June 2020 London
Image: lassedesignen/Shutterstock.com
The Universities Superannuation Scheme (USS), one of the largest UK private pension schemes for higher education institutions, has for the first time committed to excluding investment and divesting in sectors it deems “financially unsuitable”, including tobacco manufacturing, thermal coal mining and cluster munitions.
Others to be blacklisted include companies that may have ties to white phosphorus (a chemical which self-ignites on contact with air) production and landmines.
The list marks the latest move by the scheme aimed at better aligning its investment strategies, including its securities lending programme, with environmental, social and governance (ESG) standards.
USS Investment Management, which has oversight for around 75 percent of USS' £67 billion of assets under management, says it will fully divest from companies in the listed sectors within two years “if not earlier”. This, it explains, is to allow new processes to be introduced to change the way that its money is invested.
The scheme confirmed that most of these sectors, particularly those where USS does not have any existing interest, will be formally excluded much earlier.
The exclusions will apply to both the defined benefit section and within the default funds of the defined contribution section of USS.
The scheme explains that the decision to publish its first sector exclusion list comes after a detailed review of the long-term financial factors associated with investing in certain areas and is the latest move by USS’ head Simon Pilcher to align investment strategies with ESG principles.
The review concluded that the “traditional financial models” used by the market as a whole to predict the future performance in these sectors had not taken specific risks into account.
These included changing political and regulatory attitudes and increased regulation that USS Investment Management considers will damage the prospects of businesses involved in these sectors in the years to come.
Of the new investment blacklist, Pilcher says: “This is a major development for us and one that will balance both keeping the financial promises made to hundreds of thousands of members in the higher education sector, with investing in a responsible way over the long-term.
“As the majority of USS’s assets are invested directly by USS Investment Management, we will have a great deal more control over this process than other pension schemes, and where we work with external managers, we will work diligently with them to implement our conclusions via their products.”
Pilcher took over from Roger Gray in October 2019 and has since taken several radical steps to promote ESG in all aspects for USS’ investment strategies, including closing its entire equities stock-picking team in February in favour of more “responsible investment” units.
In March, USS joined other major global pension schemes, including Japan’s Government Pension Investment Fund, which publicly suspended part of its securities lending programme in December, and the California State Teachers’ Retirement Scheme in signing a statement emphasising the importance of sustainable growth.
The statement argued that companies that seek to maximise profits and ignore its impact on other stakeholders such as the environment, workers and their communities “put their long-term growth at risk and are not attractive investment targets for us”.
Elsewhere, USS has also become a participating investor and supporter of an investor initiative called Climate Action 100+, which ensures the world’s largest greenhouse gas emitters take necessary action on climate change. As one of the investors, they engage companies to curb emissions, improve governance and strengthen climate-related financial disclosures.
USS has run a securities lending programme via its custodian J.P. Morgan since at least 2013 and the exclusions are the latest example of ESG actively moulding a beneficial owner's requirements for offering out its assets.
Its equities lent in 2019 were valued by USS at £1,614 million, down from £2,899 million in 2018.
Meanwhile, bonds lent via its programme were valued at £3,063 million last year up from £1,086 million in 2018.
The scheme actively engages in repo, securities lending and certain over-the-counter derivatives markets to supplement its treasury desks liquidity needs and cover costs.
Others to be blacklisted include companies that may have ties to white phosphorus (a chemical which self-ignites on contact with air) production and landmines.
The list marks the latest move by the scheme aimed at better aligning its investment strategies, including its securities lending programme, with environmental, social and governance (ESG) standards.
USS Investment Management, which has oversight for around 75 percent of USS' £67 billion of assets under management, says it will fully divest from companies in the listed sectors within two years “if not earlier”. This, it explains, is to allow new processes to be introduced to change the way that its money is invested.
The scheme confirmed that most of these sectors, particularly those where USS does not have any existing interest, will be formally excluded much earlier.
The exclusions will apply to both the defined benefit section and within the default funds of the defined contribution section of USS.
The scheme explains that the decision to publish its first sector exclusion list comes after a detailed review of the long-term financial factors associated with investing in certain areas and is the latest move by USS’ head Simon Pilcher to align investment strategies with ESG principles.
The review concluded that the “traditional financial models” used by the market as a whole to predict the future performance in these sectors had not taken specific risks into account.
These included changing political and regulatory attitudes and increased regulation that USS Investment Management considers will damage the prospects of businesses involved in these sectors in the years to come.
Of the new investment blacklist, Pilcher says: “This is a major development for us and one that will balance both keeping the financial promises made to hundreds of thousands of members in the higher education sector, with investing in a responsible way over the long-term.
“As the majority of USS’s assets are invested directly by USS Investment Management, we will have a great deal more control over this process than other pension schemes, and where we work with external managers, we will work diligently with them to implement our conclusions via their products.”
Pilcher took over from Roger Gray in October 2019 and has since taken several radical steps to promote ESG in all aspects for USS’ investment strategies, including closing its entire equities stock-picking team in February in favour of more “responsible investment” units.
In March, USS joined other major global pension schemes, including Japan’s Government Pension Investment Fund, which publicly suspended part of its securities lending programme in December, and the California State Teachers’ Retirement Scheme in signing a statement emphasising the importance of sustainable growth.
The statement argued that companies that seek to maximise profits and ignore its impact on other stakeholders such as the environment, workers and their communities “put their long-term growth at risk and are not attractive investment targets for us”.
Elsewhere, USS has also become a participating investor and supporter of an investor initiative called Climate Action 100+, which ensures the world’s largest greenhouse gas emitters take necessary action on climate change. As one of the investors, they engage companies to curb emissions, improve governance and strengthen climate-related financial disclosures.
USS has run a securities lending programme via its custodian J.P. Morgan since at least 2013 and the exclusions are the latest example of ESG actively moulding a beneficial owner's requirements for offering out its assets.
Its equities lent in 2019 were valued by USS at £1,614 million, down from £2,899 million in 2018.
Meanwhile, bonds lent via its programme were valued at £3,063 million last year up from £1,086 million in 2018.
The scheme actively engages in repo, securities lending and certain over-the-counter derivatives markets to supplement its treasury desks liquidity needs and cover costs.
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