Thomas Helm speaks to Shiventa Sivanesan, head of investment management and stewardship at the £20.3bn West Midlands Pension Fund about putting net zero into practice
Can you tell us about West Midlands Pension Fund’s overall net zero strategy?
Our mission and vision is to create sustainable futures for all. When people talk about sustainability, there is often a natural link with positive environmental and social outcomes. As well as those considerations, we think of sustainability in the context of financial return that we generate from our assets. As a long-term investor, we have a duty to generate returns to meet our members’ pensions payments, some of which will be due in decades to come, but it’s important that they have a liveable and safe world in which to enjoy the benefits that they have worked so hard to earn.
That’s fundamentally what drives our vision and helps form our targets and overall approach. We are strong believers that it is beneficial to integrate responsible investment and ESG factors across our whole investment strategy both in terms of reducing risk but also in accessing attractive investment opportunities, in line with our fiduciary duty.
How does your climate strategy work in practice?
We published our first climate strategy back in 2019. While we have been managing climate risk within our portfolio prior to this, we felt it was important to make that first step to formally hold ourselves to account and signal our approach to our stakeholders. The targets set at the time were intentionally broad and high level, knowing that we were relatively early in formalising our strategy and appreciating that latest thinking and guidance was evolving at the time.
We updated our climate change strategy and framework document in 2021 to formalise new targets that aligned with the Paris agreement and a 1.5 degree scenario. Our current target is to be net zero by 2050 with a 50% reduction by 2030. We’ve also set targets around data coverage at the overall portfolio level, looking to have emissions data on 60% of our portfolio by 2026.
We’re now moving to map alignment and plans towards our net zero ambition. We consider this in the context of our overall strategy and direction of travel.
Our strategic asset class allocation is intentionally set at a high level in terms of asset class definitions, and we don’t necessarily set targets at sector level. We believe a well-integrated approach, seeking continuous improvement and greater alignment across the portfolio will achieve better outcomes and we remain flexible to adapt our approach as required which means we can be nimble in response to new opportunities.
You have £400m across a range of investment opportunities, including mandates specifically focused on providing Renewable Energy and Energy Transition assets. Could you talk us through that £400m figure? What investments have you already made and what investments are you considering?
As part of our latest strategy, we are increasing allocations to private markets and income-generating assets. Infrastructure forms part of that and our recent £400m commitment to infrastructure last year was to increase our allocation, including areas leading and enabling the energy transition. Our current infrastructure portfolio is over £1bn and will be £1.4bn accounting for capital that is committed and waiting to be drawn down.
We worked closely with our pooling partners and LGPS Central Ltd as our investment pool company, to design infrastructure products that can be blended to meet our requirements.
The commitment in question was made to LGPS Central’s infrastructure funds spanning core/core plus and value-add/opportunistic strategies across various geographies and sectors. LGPS Central Ltd have net zero ambitions aligned with our own and therefore are a natural partner in helping us achieve our targets. For example, one of the mandates is a commitment to NextEnergy Capital’s UK ESG Fund, an Article 9 fund which is focused on investing into new-build utility-scale, subsidy-free solar power plants in the UK.
Through our commitments, we have also invested in a specialist manager within energy infrastructure focusing on developing technologies within renewables such as offshore wind, biomass, and transmission as well as another mandate which is a global, OECD-focused infrastructure fund that targets assets such as renewable power and low carbon fuels, that drive the net zero transition. Through these mandates, we have gained exposure to attractive opportunities such as a US-based renewable natural gas platform which captures, purifies, and transports biogas from existing organic waste streams which is then sold as pipeline-quality renewable natural gas.
What factors went into the decision to invest in NextEnergy?
Our capital allocation decisions always start with a clear idea of what we want to achieve in terms of risk, return, liquidity, and how well the investment aligns with our investment beliefs. That means balancing risk-return and liquidity needs with responsible investment beliefs, ESG integration, and our climate ambition.
Once the parameters are set and agreed, in this particular example, the implementation of the mandate was delegated to LGPS Central as our pooling partner, so it is fundamental that they have a clear understanding of our objectives, and we work closely with them on this. Investments are then selected via clear process and stringent scoring criteria with a specific focus on responsible investment and engagement, with minimum standards needing to be met in order to consider a potential investment.
Regarding this specific infrastructure commitment, there’s an expectation that assets focused on renewable energy and supporting the energy transition will make up a considerable proportion of the allocation.
The NextEnergy Solar Fund is an example of a strategy that met these objectives.
Do any of your renewable investments have an emphasis on local impact?
We take a global approach across our investment portfolio, and we don’t have any firm targets around what percentage of our assets should be invested in the UK or in local investments.
Having said that, a substantial part of our portfolio is invested in the UK and we have, over time, allocated capital to local investment opportunities including direct property, infrastructure, housing, and small companies, where these have offered an attractive risk and reward, alignment with our Responsible Investment objectives and suitable scale and governance arrangements as we recognise the potential for local investment and innovation to address some of the environmental and social challenges and can align with the Government’s “Levelling Up Missions”.
Our infrastructure and direct property portfolios have historically had higher allocations to the UK, however, recent commitments to infrastructure have had more of a global focus.
In terms of that risk-return profile in the context of renewables, solar and wind seem to be the safest infrastructure bets, insofar as they are now proven technologies with predictable investment outcomes. Are you looking at anything else?
We’ve been investing in renewable infrastructure for decades so have had some early exposure to the sector. It’s great to see advancements in technology and efficiency within wind and solar making them more viable and scalable as investment opportunities. With regards to wind, we have been investing in offshore and onshore through direct holdings and as part of broader mandates. These are not restricted to the UK, and we have invested in wind globally across North America and Europe but also in more developing areas such as an Indian headquartered company to support the expansion of wind energy generators.
However, we’re very aware of increased demand on the investment side, particularly for operational assets which can put pressure on returns. We still see wind and solar playing an important part and this could be more focused on the development of such assets. But it’s not just about wind and solar, for example, we have an investment in a portfolio of hydropower plants in Europe with plans to further improve efficiency and scale.
There has been a lot of focus on developed markets, but emerging markets and less developed economies also have a huge role to play in the broader energy transition. This is something we will be considering as we develop our strategy.
We also feel it’s important that we keep an open mind and continue to look for opportunities in new and emerging technologies that can help play a key part in driving the wider energy transition such as alternative low carbon fuels and we have mandates that are specifically focused in this area. All this needs to be framed within the wider context of our objectives making sure we are appropriately diversifying and managing risk.
We’re by no means experts in this complicated field. That means it’s really important that we partner with the right people, to find the appropriate opportunities. There needs to be a strong process around picking the right managers and ensuring mandates remain fit for purpose.
Greenwashing is a real risk, of course. That emphasises the importance as an investor to know what you’re getting into and having the right partner that aligns with your values.
This is true not just for infrastructure, but across all investments. We live in a dynamic and fast-paced environment, in which there is constant change, ranging from the political/regulatory landscape to best practice and the latest scientific evidence. Having a flexible approach and partnering with investment managers who can shift and spot new opportunities and allocate capital accordingly in our view is beneficial.
How would changing the temperature target from 1.5 to 2 change your investment strategy?
I wouldn’t see this having a material impact on our general approach and overall mission and objective. Our objective is to do as much as we can to meet that fiduciary duty and play our part in reducing emissions.
The number of companies that are actually aligned to a 1.5 scenario is extremely low. Being realistic is important. Reducing emissions in portfolios is nonlinear and multifaceted. We’ll have jumps and spikes along the way, particularly as data quality and coverage improves. Having a flexible and adaptable approach to take into account the latest best practice and evidence is important. But it doesn’t mean we reduce our ambition and take our foot off the pedal.
