Insurance and pension provider Scottish Widows has become the first investor in the newly launched Authorised Contractual Scheme (ACS) Climate Transition World Equity Fund, which is designed to match the world’s transition to a low carbon economy.
The firm is initially allocating £2 billion of its pension portfolios into the Fund, which it also helped to design, and is being operated by BlackRock.
Climate Transition is a new data driven investment approach developed by BlackRock that measures a company’s exposure and management to transition risks and opportunities, seeking to provide investors with a broad market approach to invest in the transition to a low carbon economy.
It said the strategy reflects investors’ growing demand for innovative solutions that incorporate an assessment of climate change-related risks and opportunities.
Maria Nazarova-Doyle, Head of Pension Investments at Scottish Widows, said: “Offering customers more sustainable investment choices, and challenging companies in which we invest to behave more sustainably and responsibly, is a central part of our strategy. Our work with BlackRock to design this new fund, together with our significant investment, will help to engender positive change in the industry; incorporating environmental, social and governance risks into a portfolio can have a meaningful financial impact on performance.”
BlackRock added: “In this changing landscape, driven by technological innovation, regulation, and extreme weather, there are opportunities and risks associated with the transition. The Fund looks to increase investment in companies that are well prepared for this transition and to reduce exposure to those that are less equipped. The Fund offers portfolio diversification by providing exposure to companies across sectors, regions, and business maturities. The transition to a low carbon economy won’t just affect oil and gas companies, but rather all sectors – including hospitality, transportation, and healthcare.”
The Fund’s investment approach has a framework that translates low carbon risks and opportunities into five pillars: energy production, clean technology, energy management, water management and waste management. To generate an investment signal, BlackRock will score each company’s management of the five pillars into a single Climate Transition (CT) assessment, relative to the peers in their sector. The Fund also incorporates a number of exclusions: controversial and nuclear weapons; civilian firearms producers and where revenues are >5%; UN Global Compact breaches; exposure to tar sands, thermal coal where revenues are >5%.
The Fund uses a systematic process to deliver the scoring methodology, and then manages the portfolio through an optimised process off the MSCI World Index parent benchmark. This allows the portfolio management team to manage risk constraints, while maintaining cost-effectiveness for investors.
Philipp Hildebrand, Vice Chairman of BlackRock, said: “The world is undergoing a rapid transition to a low-carbon economy. This transition — driven by climate change, technological innovation, consumer preference and regulatory and policy development — is going to create winners and losers, and investors need to be prepared. With an investment strategy developed to seek to identify global opportunities and risks at an early stage, the Fund is designed to help investors benefit from this historic shift while also contributing to positive environmental outcomes.”
Scottish Widows said it is committed to being a responsible investor on behalf of its customers, whether through the investments it makes directly, the mandates it has in place with fund managers, or its position as an asset owner.
It recently launched a Responsible Investment and Stewardship Framework which outlines how it will make decisions on asset allocation, fund manager selection, fund research, and engagement activity.