USS slashes emissions, opens up about Thames Water
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More than half of the 2023 emissions reduction from investments by the £74.8bn pension fund for academics was down to a new long-term real return equities mandate, the fund has said, but is calling for more real-world action on climate. Elsewhere, it has warned that “consistent regulation” is needed after making a loss on Thames Water.
Over the calendar year 2023, the emissions intensity of the defined benefit part of the scheme’s corporate investments reduced by more than 22%, from just over 70 tonnes CO2e per million pounds invested to 55tCO2e/£m, the Universities Superannuation Scheme said in its 2024 report published on Thursday.
“Our emissions intensity is now 39% lower than in 2019, 14% ahead of our 2025 target of a 25% reduction,” wrote Simon Pilcher, chief executive of USS Investment Management.
More than half of the reduction seen in 2023 is a result of a new long-term real return equities mandate.
“The high-quality companies owned in this mandate typically have a very low emissions intensity. Alongside this, our climate-tilted equity portfolio saw a reduction in emissions intensity driven by increased exposure to information technology investments and lower exposure to businesses from the materials and utilities sectors,” Pilcher said.
The alternative income and private equity strategies, meanwhile, reported reduced emissions intensities because data from managers was more accurate, he explained.
Pilcher cautioned, however, that reported emissions intensity data “remains extremely sensitive to small changes in our investment portfolio, including our asset allocation”, and that the path to net zero will not be linear.
He called for a ramp-up in environmental action: “Despite the progress of our portfolio, we need to see much greater real-world change. This will require decisive action from all players across society, government, regulators, businesses, and individuals.”
Thames Water experience has marked USS
USS has been in the spotlight as one of the owners of water firm Thames Water when, along with other major shareholders, it refused to stomp up more capital in March to tide the company over. USS remains a shareholder, and ominously wrote it will “continue to co-operate in the next steps that flow from the end of March announcements”.
The scheme said its holding in Thames Water is “minimal” in relation to scheme assets, but Pilcher warned the experience will guide USS’ future approach to regulated assets “and more broadly”.
“An outcome like this has led to serious reflection,” the fund said. Arguing that regulated assets should be “a good fit for long-term patient investors like USS”, Pilcher said this was, however, “dependent on similarly long-term, consistent regulation that recognises the need for that investment and that strikes a fair balance between risk and returns over the long term”.
Earlier this month, water regulator Ofwat put the utility into a special oversight regime – with the firm saying it has a liquidity runway of 11 months – but did not give the green light to increase prices by up to 44%, capping this at 23% instead.
How are private markets performing?
The overall experience of investing in private markets has been beneficial, according to USS. The scheme is heavily invested in private markets, holding a third (34%) of its DB section and a fifth of its DC section’s default growth fund in private assets.
The chair of the investment committee, Russell Picot, noted that the Private Markets Group achieved positive pricing on private asset sales despite private markets lagging their public counterparts last year.
However, he said the committee found some underperforming investments had a negative impact on scheme performance, “in particular Thames Water".
USS acknowledged there was a “material decline in the value of our investment in Thames Water”, and said its approach to infrastructure investing has resulted in a wide dispersion of returns over the past 12 months, returning about 11% a year over the 10 years to the end of March.
The committee was also not entirely convinced of USS’ active management, with Picot writing that it “did not believe USSIM’s performance in the active management category was at the level achieved in other categories”.
However, he praised the investment team for a range of other activities, such as investment advice, responsible investment, counterparty risk and defined contribution performance.
The chair of USS, Kate Barker, said that “notwithstanding the losses incurred on Thames Water, our private markets team has delivered strong overall performance since it was established in 2007”, adding that “no single investment is of sufficient magnitude as to jeopardise the scheme’s ability to pay its liabilities as they fall due”.
USS’ DB section had an estimated surplus of £9.2bn at the end of March 2024.
