Trustees, Pension Funds and Climate Change

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Trustees, Pension Funds and Climate
Change David Russell, Advisor, Responsible
Investment USS Ltd Steering Committee Member of
the IIGCC Climate of Change companies, carbon
and the bottom line London, May 25 2005
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Programme

• Who are USS
• Why are pension funds interested in climate
  change?
• Is climate change a fiduciary issue
• What if it is?
• Implications for the market

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Institutional Investor Group on Climate Change

• Climate change is complex
• Individually we lack of resources knowledge,
  fewer assets, risk of contradictory messages
  collaboration adds weight
• Equip members to assess investment implications
  of climate risk
• Champion integration of investment risk into
  investment decision making/dialogue with
  companies
• Companies
• Property
• Public Policy
• An effective voice in driving forward best
  practice
• Rise of similar networks in USA and Australia

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IIGCC Members (May 2005)

• Avon Council PF
• BBC Pension Trust
• Bedfordshire County Council PF
• BNP Paribas Asset Management
• Central Finance Board of the Methodist Church
• Co-operative Insurance Society
• Corporation of London Pension Fund
• Environment Agency Pension Fund
• Ethos - Investment Foundation
• F C Asset Management plc
• Generation Investment Management
• Greater Manchester Pension Fund
• Henderson Global Investors
• I.DE.A.M. - Integral Development Asset Management
  

Insight Investment Jupiter Asset Management
Local Authority Pension Fund Forum London
Borough of Hounslow Pension Fund London Pensions
Fund Authority Merrill Lynch Investment Managers
Merseyside Pension Fund Morley Fund Management
Prudential Property Investment Managers
Schroder Investment Management UK Transport for
London Pension Fund Universities Superannuation
Scheme West Midlands Metropolitan Authorities PF
West Yorkshire Pension Fund
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Investment Decision Making
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(No Transcript)
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Financial impact on equities

• Opportunities
• Industries of the future
• Beneficiaries of energy savings
• Beneficiaries of brand imaging

• Threats
• Regulatory risk
• Physical risk
• Litigation risk
• Competitiveness risk
• Reputational risk

And also longer term implications for economies
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Other asset classes

• Property
• Impact of severe weather events
• Impact of energy saving initiatives
• Effect of transport policies and planning
  applications
• Corporate Bonds
• Credit ratings at risk as much as equity prices
• Alternatives, private equity and carbon markets
• Emissions trading
• Renewable energy and related technology

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Fiduciary duty of Trustees

• Governed by Trust Law
• Taken to mean Act in the best interest of all
  beneficiaries, usually interpreted as best
  financial interest
• In line with these definitions of fiduciary
  responsibility, it is consistent for pension
  schemes to address climate change risk Mercer
  Investment Consulting 2005

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Recommended actions

• Questions for pension fund Trustees
• Is climate change going to affect out long term
  investments?
• What are our managers and consultants doing about
  it?
• What resources should we apply to this issue?
• Questions for pension fund consultants
• What expertise do you have regarding climate
  risk?
• How do you engage with managers on this issue?
• How do you factor climate risk into your
  recommendations?
• Can you assess the potential risk of CC on our
  total assets?
• Questions for fund managers
• What expertise do you have regarding climate
  risk?
• How do you engage with companies on this issue?
• How do you factor climate risk into investment
  decisions?
• Can you assess the potential risk of CC on our
  portfolio holdings?

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Implications for companies

• Climate change moves from being a CSR issue to an
  IR issue
• IR professionals need to tool up
• Better reporting of climate exposure and
  management OFR and other reporting
• Better management of the risks .. And
  opportunities!

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Final thoughts

• Pension Funds are becoming more interested in
  climate change
• The cost of carbon does and will affect
  investment decisions even over the short term
• The changing climate will impact on local an
  global economic performance therefore will impact
  long term investments
• Aligning CSR with pensions policy what is your
  fund doing?

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Contact Details

• IIGCC Secretariat
• E-mail info_at_iigcc.org
• Web www.iigcc.org
• David Russell
• Advisor Responsible Investment
• USS Ltd
• Tel [phone]
• E-mail drussell_at_uss.co.uk

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Trustees perspective

• Longer term focus than fund managers/advisers
• Interested in whole market return, not just
  relative return
• Cant leave it to others to act must take a
  lead and encourage other market players to take
  up their appropriate roles and responsibilities

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Universal investors avoiding the externalities

• Pension funds own a slice of the investment
  universe
• Performance relates to the economy
• Externalities impact upon economic performance
• Climate change could affect national global
  economic performance
• The ultimate beneficiaries of most investment
  activity include the greater part of the adult
  population who depend on private pensions and
  life insurance. It makes little sense for pension
  funds to support commercial activity which
  creates an equal or greater cost to society by
  robbing Peter to pay Paul.
• Hermes Principle 10