Two pension funds in the Access pool of the Local Government Pension Scheme are taking steps to increase sustainable investments, looking to decarbonise equities and increase sustainable alternatives.  

Two county council pension funds in the South East of England have considered their approach to sustainability recently. The circa £9bn Hampshire Pension Fund’s panel and board decided last autumn that by 2026, the fund’s alternatives portfolio should increase sustainable investments to 20% of private equity, 50% of infrastructure and 10% of private debt. They also agreed to join Pensions for Purpose, a group promoting impact investing to pension funds. The fund aims to be net zero by 2050.  

Currently, the fund holds about 22.5% in alternatives, with 3.5% of its total assets – about £313m – in sustainable alternatives. Officers had asked alternatives managers how far they could increase sustainable assets by 2025-26 without compromising the pension fund’s investment targets. They were told by managers that they could double their allocations, to a combined 7% of fund assets in sustainable investments.  

“This was considered an initial step for the fund for the first time establishing a target for sustainable alternative investments,” documents note, adding: “Beyond 2026 the target could be revisited with the investment managers in the expectation of further increases.” 

The current 3.5% includes £52m in the UK which the panel was told would count as investment in the government’s ‘levelling up’ agenda, and £40m in UK property. 

As the representatives of the 200,000-member fund were deliberating on 29 September 2023, campaigners protested in Winchester. The protest was organised by Hampshire Pension Fund Divest, according to local media, and included members of Unison, the Green party, Winchester Labour Party and Extinction Rebellion.  

“The pension fund has taken a number of actions to reduce the carbon footprint of its investments, the latest of which was agreeing to target over 30% of the fund’s alternative investments... being invested in sustainable and impact investments by 2026,” said a spokesperson for the Hampshire Pension Fund panel and board, saying that part of this is expected to be in the UK as the target applies to the current global portfolios.  

In December, councillors looking after the Kent Pension Fund, which handles about £7.8bn for its members, resolved to adopt a 2050 net zero target and follow the decarbonisation curve of the Intergovernmental Panel on Climate Change. This involves decarbonising the equity portfolio by 43% by 2030 and 69% by 2040, as well as engaging with fixed income managers “to understand [the] feasibility of climate targets, working towards target setting for this allocation”, the fund says. 

The committee also set a target of 15% for sustainable assets by 2030, “including climate solutions”.  

The motion was agreed unanimously after two committee members had proposed more ambitious goals which were voted down. This would have seen the fund aim for net zero by 2045 and reducing carbon emissions in the equity portfolio by 50% by 2030 and 75% by 2040.  

Kent’s pension fund is also undertaking a number of other investment changes, including allocating to emerging market equities via the Access pool and allowing the use of index-linked gilts as collateral. It is also redeeming a total return investment, worth about £382m last March, from Pyrford to invest in the absolute return fund managed by Ruffer that is provided by Access.  

Mike Clark, founder of consulting firm Ario Advisory, says there is an increasing recognition that pension fund fiduciaries are investing for a world worth living in. 

Compliance is another factor. Legislation requiring larger private sector pension funds to disclose their exposure to climate risk and how they manage it, in line with the Task Force on Climate-related Financial Disclosures, has helped give urgency to the topic, and there was a consultation on extending the requirement to the LGPS in autumn 2022. However, a government response to this is still outstanding.  

Clark believes that some in the industry are increasingly doubting the usefulness of such reporting, which can tie up resources, saying the focus should lie on governance over quantification. 

“There is a growing recognition that TCFD reporting for pension funds is not decision-useful and transition plans may well be the way forward,” he argues. Clark says the decision-making framework for investors “simply treats risk as price volatility and essentially ignores the source of that volatility”.