Stewardship a “Critical Component” of Border to Coast’s Climate Strategy
Following its first year of direct climate engagement, UK scheme also emphasises partnership as helping asset owners act at scale.
UK-based local government pension scheme (LGPS) pool Border to Coast has stressed stewardship’s role in its efforts to reach net zero, following the recent publication of two reports outlining activities over the past year.
Earlier this month, Border to Coast – the UK’s largest LGPS pension pool, counting more a million members and is responsible for overseeing £52.3 billion (US$68.8 billion) of investments on behalf of 11 LGPS funds – released its latest Climate Change Report alongside its annual Responsible Investment (RI) and Stewardship Report.
The climate change report outlined Border to Coast’s approach to managing climate-related risks and opportunities, including progress against its Net Zero Roadmap – originally published in 2022, outlining proposed steps to achieving net zero greenhouse gas emissions across the pool’s investment portfolios by 2050 or sooner.
The RI and stewardship report covers the first full year of Border to Coast’s direct engagement with companies on climate, showcasing its votes on 13,406 resolutions at 1,052 meetings in the year to March 2024, as well as detailing its strengthened voting policy.
“Stewardship is a critical component of our roadmap, with engagement being the primary mechanism for driving alignment to net zero in our portfolio companies and thereby meeting our net zero targets, both at asset class and investment portfolio level, as well as for driving real-world decarbonisation,” Colin Baines, Stewardship Manager at Border to Coast, told ESG Investor.
The scheme updated its voting guidelines for the 2024 proxy voting season to strengthen its stance on climate change.
This included a commitment to generally vote in favour of shareholder resolutions aligned with the objectives of the Paris Agreement, taking a ‘comply-or-explain’ approach and publicly disclosing its rationale if voting against.
“Our voting enhancements on climate issues have led to significant votes against management at AGMs, including opposing chair of the board re-elections and ‘say on climate’ management resolutions and supporting independent climate resolutions,” said Baines, noting also that pre- and post-AGM engagement accompanied these votes.
Strengthening stewardship
Border to Coast has set a target for 80% of its financed emissions to be subject to engagement by 2025, and 100% by 2030. To ensure impact in its first full year of direct climate-led engagement, the pool identified the largest emitters within its listed equity portfolio to help prioritise where active stewardship was most urgently required to manage climate risk.
According to Baines, the scheme has now identified the top 40 holdings contributing to its financed emissions and any companies that are not currently subject to engagement by either Border to Coast or investor collaborations “will be a priority for engagement over the next year”.
As noted in its RI and stewardship report, the scheme has engaged with companies representing 68% of the emissions covered by its net zero roadmap, having extended its activities to reach 20 more firms than last year. In February, Border to Coast also took steps to solidify its RI policies to further develop and embed climate and ESG risk management as part of a broader annual review.
“A number of our engagements are progressing well and we are starting to see some improvements,” said Baines. “However, our engagement programmes are typically multi-year as it normally takes that long to see results in terms of material changes to policy and practice.”
Key engagement themes for the LGPS include low-carbon transition, waste and water management, and social inclusion and labour management.
Border to Coast’s low-carbon theme looks to engage with companies in high-emitting sectors and banks identified as key to financing this transition. The primary objective is to encourage companies to adapt their business strategy to align with a low-carbon economy and reach net zero by 2050 or sooner.
The theme encompasses climate governance, strategy and alignment with the Paris Agreement, board oversight and incentivisation, Scope 3 emissions and the supply chain, and just transition.
In July 2023, Border to Coast started a new just transition engagement programme, which seeks to integrate a social dimension into decarbonisation strategies. This includes mitigating social risks, seeking social opportunities, and focusing on placed-based impacts “to address systemic threats to long-term stability and value creation”, according to Baines.
Border to Coast has collaborated with Royal London Asset Management to engage with four UK banks to pioneer the integration of just transition into their net zero strategies. Two banks have committed to take the requested action, while a third has included just transition ambitions in its net zero plan, and the fourth has stated support for just transition principles.
“The 2023/24 period was our first full year directly engaging with companies, and we will continue this important work as well as increasing our scrutiny of our external managers voting and engagement to ensure alignment,” he added.
Noting the recent departures of US asset managers from the Climate Action 100+ investor-led initiative, Baines said collaborative climate-related engagement remained vital.
“We have seen through our work at Border to Coast that acting at scale gives asset owners a stronger voice. We know we’re stronger when we work together and recently joined with other investors representing US$5.1 trillion to publicly reiterate our support,” he said.
Increasing climate investment
According to Border to Coast’s climate change report, it had made £8 billion of climate solutions investments in its equity and fixed income portfolios in the period covered, up from £6.9 billion, as well as deploying £2.5 billion through its private markets programme.
In May, Border to Coast raised a further £1.2 billion to invest in global climate solutions and support its ambitions to reach net zero carbon emissions.
According to the report, the pool’s portfolio emissions have decreased 58% on 2019 levels, ahead of the interim 53% reduction target by 2025 set in its Net Zero Roadmap. Additionally, 70% of Border to Coast’s AUM are now covered by the roadmap.
LGPS pools are considered important channels for steering capital to climate-positive investments in the UK as well as domestic assets more broadly. A recent report by the Pensions and Lifetime Savings Association identified the LGPS as the UK’s largest funded public sector scheme, managing more than £400 billion of assets for six million members.
Last week, the Local Pensions Partnership Investments – one of the UK’s eight LGPS investment pools – called on the UK government to make it easier for LGPS pools to invest in the country, with experts at the organisation stressing that any reforms will only be successful if systemic barriers are also addressed.
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