The link between responsible investment and financial returns is now well established. Companies that disregard environmental, social and governance (ESG) risks are likely to struggle in an ever-changing world and no long-term risk is more critical than the issue of climate change.
In October 2018, the UN Intergovernmental Panel on Climate Change stated there are ‘only a dozen years for global warming to be kept to a maximum of 1.5°c – beyond which even half a degree will significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people’. The impacts are already apparent, the latest example being the extreme wildfires in Australia fuelled by record temperatures and months of drought.
This need for change presents a clear risk that must be understood and prepared for by long-term investors. At Nest, we developed the Climate Aware Fund (CAF) in partnership with UBS to help us understand the risks and ready our members investments for a changing world. The fund makes up a significant proportion of our equity allocation in our default funds. So far, it has reduced carbon emissions equivalent to taking 44,000 cars off the road each year and has invested millions more in renewable energy compared to the benchmark.
The CAF incorporates a forward-looking glidepath, which adheres with the UN’s Paris Agreement to limit global warming to 2°c, giving greater exposure to companies that operate their businesses according to this target. Alongside our fund manager, UBS, we’re engaging with companies considered to be the weakest performing from a climate change perspective to push for improvement over time.
Over the longer term, we plan to do more and we’re currently testing a more ambitious target of 1.5°c. We’ll be evolving the CAF, such as targeting more sectors beyond high impact sectors and further rewarding companies involved in the supply chain of equipment, machinery or technology to renewable energy generation companies – crucial in finding solutions to reduce carbon emissions.
Factoring environmental policies into our investment strategy is not only absolutely key to driving better long-term investment results for members but also contributes to global efforts to tackle climate change. The climate change risk to both our members lives and their investments is real. In good conscience we cannot stand by and do nothing – whilst we are encouraging the fossil fuel companies to evolve and become part of the solution we won’t wait forever. Sooner or later investors like us will have to make even bolder and tougher decisions. This is crucial to help ensure that our members can enjoy a better retirement in a world worth living in.
Read Nest’s Responsible Investment report for more on how it’s boosting efforts to tackle the risks posed by climate change.