David Russell, the co-head of responsible investment for the Universities Superannuation Scheme, Britain’s second-largest pension fund talks about how it’s adapting to a changing climate.

How can climate change affect pension assets?

DR: It is already impacting on our returns. In Europe, we have an emissions trading scheme—which I know is being discussed in Canada and various U.S. states—that impacts the performance of companies that we invest in. In addition, other government policies are definitely driving toward a lower-carbon economy. And that impacts the real estate assets that we have and a whole different range of companies that we invest in. And coupled to that there have been the obvious physical impacts of changing weather. And it’s always difficult to assign changing weather to a changing climate, but we’ve had the most severe hurricanes ever, the first hurricane ever to hit South America, a drought in the U.K. and a heat wave in Europe in 2003 that led to an estimated 20,000 deaths. These impacts are real and measurable.

Comment on the responsible investing policy at Universities Superannuation Scheme.

DR: We don’t screen out investments on environmental, social or ethical grounds. Our trustees have decided to adopt a policy that basically says we believe those sorts of extra-financial issues will impact on the value of companies or other assets if they’re not managed properly. So, poor corporate governance impacts value. Poor environmental management and poor carbon management impact value. Poor management of the company’s people impacts value. Therefore, it’s in our interests as a large owner to make sure we can take those into account in our investment decisions. If we see that there are potential failings in those areas, then we can encourage better performance and therefore gain better value from those investments. Secondly, we are part of a group called the Enhanced Analytics Initiative. What we do is allocate 5% of our research budgets to the best research that covers extra-financial, environmental, social or governance or such like issues to basically generate better research so we can make better investment decisions.

How does the U.S.S. look at a company and determine whether climate issues will have an impact?

DR: It’s incredibly difficult. It’s a relatively new area of work for us at U.S.S. We have actually employed an analyst who is part of the responsible investment team, but whose role it is to sit between us and our in-house fund managers to translate and convert and generate information in a format they can actually use in their investment decisions. It’s not enough to say that climate change could affect utilities. The question is how and how much.

What is the state of disclosure with the companies you invest in?

DR: It’s improving, and improving dramatically. In the U.K., for example, the vast majority of the FTSE 100 do provide CSR [corporate social responsibility] reports of some kind or another. Most companies in the FTSE 100 will provide data to the Carbon Disclosure Project, and that’s something we’ve supported since it started in 2002. More generally, we have a concern that there is a disconnect between CSR information and company strategy and performance information. So, from our perspective, what we’d like to see more of is companies making a link between the most material environmental, social, governance issues that they face and their forward-looking strategy, and how they’re going to manage those issues.

How will climate change the way pension funds are invested?

DR: I’m not sure it will. Pension funds still have to invest to make sure they get the returns they need. But what I think pension funds need to be doing is looking at the companies and other assets they’re investing in to make sure they are addressing the issue. There’s also an allocation of capital to the alternative, low-carbon economy where there is money to be made. But, in general, we will stay invested in mainly the same companies and the same markets we’re in now and just be aware that this issue can impact on returns and encourage the companies that we’re invested in to address it.

Don Bisch is the editor of BENEFITS CANADA. don.bisch@rci.rogers.com

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© Copyright 2007 Rogers Publishing Ltd. This article first appeared in the July 2007 edition of BENEFITS CANADA magazine.