2020 has been the year in which the UK’s Church of England went into the index business, with the January launch on the London Stock Exchange of the FTSE-TPI Climate Transition Index.
2020 has been the year in which the UK’s Church of England went into the index business, with the January launch on the London Stock Exchange of the FTSE-TPI Climate Transition Index.
The initiative was driven by the Church of England (CofE) GBP2.8 billion Pensions Board and October this year saw the Board invest GBP700 million into the new index in a further demonstration of their support for the partnership that created it between the Board, FTSE Russell, the Transition Pathway Initiative (TPI) and the Grantham Research Institute at the London School of Economics.
The TPI itself is supported by more than 80 global investors, including UK pension funds such as the BT Pension Scheme, the Universities Superannuation Scheme and asset managers such as Aviva Investors, CalPERS and Allianz, with more than USD21.7 trillion in assets under management and advice.
Adam Matthews, Director of Ethics & Engagement at the Church of England Pensions Board and Co-Chair Transition Pathway Initiative (TPI), explains that the CofE fund has always sought to embed ethics into the way it invests.
“The responsible investment trend has grown rapidly and really taken off over the past 10 years,” Matthews says.
“We’ve been developing TPI since 2017 together with the Environment Agency Pension Fund and various other asset owners. It’s been set up to be an academically robust and independent public good tool in terms of helping asset owners understand the transition. As the tool has grown over the years, the depth of understanding of the transition has deepened and TPI began to reach a scale of coverage which gave us confidence to want to integrate its insights into our passive investments. Our passive holdings represent almost one third of our fund.”
Matthews says that it was time to look at ways his pension board could put that insight into an index that could meet the boards’ needs, but equally be of interest to other pension funds as well.
His board ‘challenged’ FTSE Russell to come up with an index that embedded the insights of the TPI but also built in incentives to reward companies if they had set the most ambitious goals in line with the Paris Climate Agreement.
The response to the launch of the index has been ‘really encouraging’ Matthews says, who spends much of his time talking to other pension funds and companies about climate.
“There is a lot of interest because the index embeds that forward looking TPI analysis of company commitments. It really distinguishes this is an evolution of indices with embedded factors that look forward and that is really appealing to people.”
The index connects its investors to stewardship because the results of engagement of initiatives such as Climate Action 100 directly impact on TPI assessments and in turn the weightings given to companies in the index. Importantly, for the Board it has meant that they have not disinvested from high carbon intensive sectors buts differentiated between those companies putting in place transition plans and those that have not.
Companies that respond with a commitment to reduce their carbon emissions are rewarded in the index, with a double weighting if they commit to a net zero target.
Equally a company that does not disclose to the TPI doesn’t make it into the index, an action that reinforces stewardship, Matthews says: “The door isn’t closed though as a company could make the index if they change their approach and this is a powerful reinforcement of climate engagement with real world consequences.
“Companies are keen to maintain the support of their shareholders and if a positive incentive is being created then it’s something that companies pay attention. The more the market moves towards this approach and embeds that insight, the more you will be encouraging the transition.”
As yet, there is no ETF linked to the index, although Matthews is keen to see one created, and encouraging efforts for that to happen.
The pension fund’s own investments went in to the index in October and so no performance figures have been released as yet.
It’s unusual to see a faith organisation actively involved in investment. Matthews says: “We seek to embed the ethics of the CofE in the way we invest, but I don’t believe the strategy we have developed would be any different from a financial perspective as we have that fiduciary responsibility as well. We want to ensure our beneficiaries have a pension and a world in which they can retire into.”
Matthews reports that the landscape is moving very quickly as previously strongly held beliefs of what could not be done in investment are being challenged.
“We are looking at how we can use TPI as a tool that can aid us in other asset classes such as corporate and sovereign bonds,” he says.
“Climate is a systemic challenge to everything we do. We are a long-term investor, an open pension fund, and we will be here for multiple decades. The challenges will only grow.”
