NILGOSC believes that climate change presents a material financial risk to the Fund and therefore takes climate risk considerations into account as part of its investment strategy. NILGOSC considers that this approach is consistent with its fiduciary duty to act in the best long-term interests of its members and to deliver the long-term returns necessary to ensure an affordable and sustainable pension fund.
More than half of the Fund’s assets are actively managed and NILGOSC only appoints active investment managers who can take climate change risk into account when making investment decisions. A significant portion of NILGOSC’s assets are held passively and managed by Legal & General Investment Management (LGIM). Passively managed funds are designed to follow an index, and no active decision-making is undertaken, therefore Environmental, Social and Governance (ESG) issues, including climate risk, cannot be taken into account specifically. However, a decision can be made in the selection of which index to track. Therefore, as a means of mitigating climate risk in the Fund’s passive equity portfolio, NILGOSC’s passive equities are held in a fund which tracks a climate-tilted, carbon transition index.
The fund, which is managed by LGIM, tracks the ‘Solactive L&G Low Carbon Transition Developed Market’ index and seeks to replicate the performance. The strategy behind the index is to self-decarbonise by reducing exposure to carbon emissions over time. The index has an overall objective, which is to meet the stricter of: a ‘carbon emission intensity reduction objective’ of at least 70% (except for the UK region, where the reduction is set to 60%) compared to the base regional index; or a ‘decarbonisation objective’ of at least 7% year-on-year. The universe of holdings within the index covers all developed markets but excludes companies on LGIM’s Future World Protection List, namely: companies considered as perennial violators of the UN Global Compact; certain companies involved in controversial weapons manufacturing and production; and certain companies with involvement in mining and extraction of thermal coal, thermal coal power generation or oil sands. Each holding within the remaining universe is assigned a ‘carbon score’, based on three indicators: emissions intensity; reserves intensity; and green revenues. Using the overall climate scores, an adaptive tilt away from climate laggards and towards climate leaders is applied to capital allocation within the index.
A full list of the components of the Solactive L&G Low Carbon Transition Developed Market index, as well as regularly updated factsheets, are available on the Solactive website.