Nest to Reduce Carbon in its Growing Emerging Market Strategy

The National Employment Savings Trust (Nest) will nearly double its emerging market allocation while also reducing the strategy’s carbon footprint, the fund said Tuesday.

The UK-based pension plan will increase its emerging market assets to US$1.2 billion by February, or about 6% of its $19.4 billion portfolio, according to the fund. At the moment, the pension fund had just $639.7 million devoted to the strategy, or just 3.5% of its total assets.

At the same time, the pension fund said it will reduce investments in companies with large oil and gas reserves, while also increasing funding into clean and renewable investments.

Nest will incorporate environmental, social, and governance (ESG) strategies into the allocation to assess investments based on three criteria: energy efficiency, alternative energy, and green building. A customized index produced with Northern Trust Asset Management (NTAM) will score the companies in its portfolio.

“Emerging markets are an exciting growth area, and we believe we can continue to successfully invest while working towards our net-zero goal,” Nest’s Head of Responsible Investment Diandra Soobiah said in a statement.

The British pension fund joins other institutional investors looking to the emerging market sector for greater returns amid historically low interest rates. Some nations, such as China and India, are expected to grow their urban centers over the next two decades, thanks to a rising middle class and a greater number of young people.

But Nest is also pledging to focus on cleaner energy in countries that are still heavily dependent on “dirtier” fossil fuels. In countries like China, India, and other emerging market nations, experts say fossil fuels such as coal are still expected to play a large role in the energy landscape, even as a growing number of allocators are pledging to divest of fossil fuels altogether. Coal is cheaper than other alternative sources of fuel.

Still, Nest is betting that clean energy will surge in emerging markets, and will reward members over the long term with sustainable returns:

“Many emerging economies are also thinking hard about how to harness green technology to fuel their growth and leapfrog the dirtier industrialization trends of the past. This presents opportunities for investors,” Soobiah added.

Other institutional investors are betting on clean fuels. Earlier this year, the Canada Pension Plan Investment Board (CPPIB) said it doubled down on renewable energy firms in 2020 to C$6.6 billion (US$5.2 billion).

Nest is reputed for its focus on sustainability. By February, the climate strategy in its emerging market portfolio will bring the fund’s climate investment strategies up to 51% of the total portfolio, up from 45% in July when the fund pledged to align with the Paris Agreement. Nest said it will halve the carbon emissions in its portfolio within 10 years and achieve net zero by 2050.

Divestment is an ESG strategy the pension fund’s CIO, Mark Fawcett, has advocated for in the past as a last resort for when active engagement has failed, or when an asset is deemed inappropriate for the plan. In the past, Nest said it would divest its portfolio of thermal coal, oil sands, and arctic drilling by 2025. In June 2019, it said it would cut tobacco companies from its portfolios, a goal a spokesperson for the fund said has been completed this year.

As the largest workplace pension fund in the UK, it also has some teeth; Nest represents nearly a quarter of the UK’s labor force with more than 9.5 million members.

“It’s crucial that investors in such a strategy are active stewards for companies in emerging markets,” Soobiah said in a statement. “We’ll encourage companies to prepare for the low-carbon transition to ensure they remain attractive investments for our members.”