Case study: Helping Brunel raise climate standards across the finance industry

Brunel Pension Partnership was formed in 2017 as one of eight Local Government Pension Scheme (LGPS) pools in the UK, bringing together c.£30 billion in investments from 10 LGPS clients. Since then, it has become renowned as a leading figure in the UK’s responsible investing scene.
Brunel was the first LGPS pool to sign up to the UN Principles for Responsible Investment. It is an active member of the Institutional Investors Group on Climate Change (IIGCC) and of Climate Action 100+, while Faith Ward, Brunel’s Chief Responsible Investment Officer, co-chairs the Transition Pathway Initiative on behalf of the Environment Agency Pension Fund.
In January 2020 Brunel launched an ambitious Climate Policy, setting out a five-point plan to build a financial system fit for a low-carbon future. The policy commits Brunel to using its influence to change the behaviour of asset managers and companies, using TPI data as a key benchmark.
Influencing companies
Brunel set an ambition to have all its material holding companies reach TPI level 4 for management quality by 2022 and is engaging with low- ranking companies to persuade them to advance at least one level each year. Brunel carried out 867 engagements with companies in 2019, with climate change a key priority.
Brunel has also aligned its AGM voting with its engagement policies and will now vote against the re-election of the Chair of companies ranked below Level 2 by TPI. For the energy sector, this minimum is raised to Level 3. In 2020, 18 companies were flagged for voting action on these criteria.
Influencing asset managers
Brunel also uses its leverage with asset managers to drive climate awareness in portfolio construction. Last year it engaged with over 130 asset managers and reviewed 530 investment strategies from a climate perspective.
Brunel policy requires managers to demonstrate materially-reduced climate exposures and effective engagement that puts companies on a trajectory to align with the goal of limiting climate change to 2°C. Brunel uses TPI’s carbon performance data and carbon footprinting as key tools in reviewing the effectiveness of these strategies and engagements.
Engaging with fund managers on carbon-intensive holdings
To give one example, Brunel identified that one of its global equity portfolios had holdings in two companies exposed to extractive revenues. But using TPI data, it discovered that the two companies were very different in their strategic approaches to climate change. Company 1 was ranked at Level 4 by TPI, having reported all of its Scope 1, 2 and 3 emissions, and set targets on reductions. Company 2 was ranked at Level 2, and had not yet reported on its Scope 2 greenhouse gas emissions. Brunel thus engaged with the investment manager, who concluded that Company 2 no longer fell within their investment thesis and would be removed from the proposed portfolio.
TPI data also helped Brunel to shape portfolio construction in its Global High Alpha strategy. The carbon footprint of one prospective manager for this strategy seemed high. However Brunel found that 70% of that carbon intensity was attributable to a single holding – LafargeHolcim, a cement producer. TPI data shows Lafarge to be at Level 4 and therefore aware of climate risks. Brunel report the data was extremely helpful for making manager selection decisions.
Brunel’s approach of data-led engagement is clearly bearing fruit. All of its active portfolios now have a carbon intensity at least 7% lower than their respective benchmark, with many substantially lower. Moreover, 70% of the market value of Brunel’s Active Equity Portfolios is derived from companies rated TPI Level 4 or above for management quality.
At the Sustainable Investment Awards 2020, Brunel was named Pension fund of the year and won ESG initiative of the year for the partnership it formed to help create its Climate Policy.