Investing for a Future Worth Retiring In

LSEG’s Group Head of Sustainability Jane Goodland speaks to Adam Matthews, Church of England Pension Board’s Chief Responsible Investment Officer and TPI Chair, to discuss the roadmap towards net zero and the critical role that responsible investment has to play in climate transition.

The conversation focuses on mobilisation, and the need for real action supported by public policy and access to finance. Adam also outlines his long-term vision and where he sees opportunities to drive change with a strategy built on action, delivery and accountability.

The Net Zero Conversations series was filmed at the Net Zero Delivery Summit, hosted by the City of London Corporation in association with the COP 26 UK Presidency 2022 and the Glasgow Financial Alliance for Net Zero (GFANZ).

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Adam, welcome and thank you forjoining us on Net Zero Conversations.Thanks very much for having me.So let's start byexploring your several professional hats.So you're at the Church of England pension board,but you're also with the transition pathway initiative.So tell us a bit more about those.Well, first andforemost my main day job is asChief Responsible Investment Officerat Church of England pensions board.We have a pension fund for 41,000 beneficiaries.It's just under 4 billion pounds.And our job is to provide a pension intothe coming decades for many people as they retire.But we hold very much the value that theyalso need a world to retire into.So issues like climate change,challenge our ability tomanage our investments over that timeframe.And so therefore, it's really important that wealso understand the climate transition,the opportunities, the risks,and that's where my second hat comes into bear,which is as chair of the Transition Pathway Initiative,which is a tool thatwe've set up with the London Stock Exchange Groupwith a number of asset owners andthe London School of Economics toensure that we can understand the transition,as an asset owner to really fulfillour duties as a fiduciary.And at the same time reallydrive change in the real world and seereal-world emissions reduction so that that worldthat people retire into isn't impacted by climate change.So Adam, it's been some time since COP26 last year.I'm wondering what are your observationsand reflections of progress made since then?Well, it's about delivery and I thinkthe focus of the summit that's been heldat that sort of midway point isa really good moment to reflect on what hasbeen achieved in Glasgow andnow what needs to happen as we movetowards the next COP in Africa,because a huge mobilisationoccurred in advance of Glasgow.You had GFANZ,you had all of these commitments,but the point is, does thattranslate to real action on the ground?And I think the pressure is on,the scrutiny is on to demonstratethat those very big numbers of many,many trillions are actually resulting inreal-world change in the way that we invest andin the way that companies aretransitioning on the ground.And that countries are also gettingthe access to the finance they need to makethe difficult transition paths that many of themhave got to take in their economies.So my sense is that a real important mobilisation occurred,and a huge signal from finance that it's there.But at the same time,a real need to now demonstrate that sortof flow through to genuineaction so that it's not just about2050 targets, it's about 2030.What happens in this eight-year periodto ensure that 2050 is a reality.And I think it's a focus onaction delivery and accountability.And you're seeing a real pressure on that.I think the other aspect is a real need todemonstrate public policy is aligned to net zero.So you had more commitments made at COP.I think in best scenario it's about1.8 if they're all implemented.But that still challengesus because it's not net-zero aligned.And when you look at difficultsectors that need to transition,there's still a lot of policy that needs tobe brought in alignment withnet-zero objectives to enable companies totransition and in turn toenable us as an investor to remain invested in them,which is something we want to do.And more and more companies are starting to set out andpublish their own transition plansor net-zero strategies.What work is going on to be ableto assess the credibility of those plans?Because one concern is, is like you said,how do you really see the translationfrom big pledges to plans and action?Well, I think the transitionplans that companies have started to bring forward,some have been brought to vote.I've engaged with a number ofcompanies and encourage them to do this.I think they're a really positivething for a company to do.Because it tells you as an investor,as an owner of that company what the intention ofthe management is to addressthis systemic challenge to that company business.It provides them with an opportunityto set out a strategy,to then seek the support oftheir shareholders for that strategy.And if they do get that support, well,that's a really good endorsement to get on with it.And hopefully to go even further faster,aligned to the ambitionof the targets that the company sets.So my sense is it's a veryimportant piece of the architecture.It's essential we get the factors that is,that sort of determines what a good plan,well understood.So you've had the first-mover advantageof those companies that have come over the last year,this year with their transition plans,I think they've started todemonstrate what needs to be in them.I think we still need to define some of the boundaries ofall the emissions that need to beaddressed fully in those plans,the level of ambition of those targets,and then really looking at things likethe capital expenditure, evidencing that that'saligned to deliveringthe strategy that the company sets out.And lastly, I'd say that the lobbying and public policythat those companies alsoengage in through industry associationsand directly is also aligned to delivering that plan.So I think there's lots of elements to these plans.I think they're very important.I'm encouraged by them.We want to see companies bring themforward and I think be open aboutthe dependencies of your ability to achieve your targets.Because I think we want to share your ambition.We want to understandthe challenges you've got in delivering those targets.And then we want to work with you.But it's very difficult for us to do that if youdon't set out those plans andthose dependencies very clearly.And so you spoke there about the conversation that goes onbetween companies and investors.Can you talk to me a bit moreabout engagement as a strategy versusdivestment from high emitting sectorsbecause this is a debate that's going to run and runWhere, where does the Church of England Pension Boardsit on that kind of dynamic?Well, I mean, we do use disinvestment in on occasionswhere we feel that a company iseither not responding to our engagement,or where we view that a company orparticular aspects of a sectoraren't part of the transition.And on a number of other issues we do disinvest.However, it's not our preference to do that.Because fundamentally, I think there'sa really important role for us to havehonest and open dialogues with companies,for them to set out their plansand to work with them inhelping them actually ensure that a)they're ambitious enough and b) that they've actually gota credible plan in delivering on their targets.Now if you can make that work,then that means you don't need todisinvest and the point ofthe transition is its transition over time.And so therefore you can be accompany in a high emitting,high carbon intensive sector.But really it's about your plan to get from whereyou are today to where you need to be,and the interventions you're going to make to achieve that.Now if you could do that well,then I think you can carrythe confidence of your shareholders,carry the confidence of them inthe board and in the directors.And I think then we becomea sort of partner in helping support the company,but also potentially providingthe transition finance for them.But it's essential that we have independent toolsto really track and hold companiesaccountable on this and check thatthe veracity of the plans and I thinktools like the Transition Pathway Initiativeare really important to doing that, andso that's why as a fund, we use that to determinewhich companies are transitioning and which aren't.And now you can differentiate. When Istarted working in this area,you couldn't differentiate betweencompanies based on this kind of independent assessment.Now you can differentiate all the highcarbon sectors, and that's what we've done.We have a passive index,the FTSE TPI Climate Transition Index.It differentiates on every high carbon sectorbetween those companies that aremoving and those that aren't,and those companies that are movingget double weighted in that index.Those that aren't, don't make it.And yet they could if they set the right plan.So I think that's where it's really important thatwe understand the role of transition plans,but also the way in which you can now makedifferentiation decisions in sectors,which means that you don't have toexit high carbon sectors.You can engage with them, work with them,and then work out which companies are moving.So we really need reallyhigh-quality information and that Ibelieve is part of the planfor the TPI Climate TransitionResearch Centre that was announced last year.So where are we on that?When can we expect to see thatlaunched? We're very shortly to bein a position to open the doors tothe new TPI Global Climate Transition Centre.And absolutely delighted with the supportfrom London Stock Exchange Group.Also the other partners that have come inbehind the Centre to ensure thatit can be created at the London School of Economics,Grantham Research Institute.And this is going to really enabled us toscale the coverage of our assessments. At the moment,we're covering about just under 600 companiesin listed markets,we're going be able to go up to 10,000,particularly with the support ofFTSE and the data that will becoming to enable a lot ofthe assessments of the academics at the LSE.Equally, we're going to be lookingat other asset classes,sovereign bonds and also corporate bonds.So our sense is thatthis centre is going to be a really important part ofthe architecture and infrastructure that supportsinvestors to really dealwith the challenges of climate change,understand the risks, understand the opportunities,and play a very constructive rolein driving the transition.So I'm excited. It's imminentlythere'll be hopefully a party as we openit and it will be able to scaleat pace because the need is absolutely there. Yeah.And you mentioned about actuallythe expansion of the coverage.And I think the thing that's reallyimportant is that it'sgoing beyond listed equities. For a,for a wholesale transition of the whole economy,we need to think about beyond asset classes.So we're really excited to seethat as that research comes through.The other thing I wanted to touch on Adamwas, we talk about a just transition.And it's a phrase which is bandied around a bit,Talk to me a bit about that.And I believe that there's some news about kind of workthat's ongoing about how we really start to getcapital to some of the emerging and developing economies?Well, fundamentally, the transitionis not going to be just unless you cansupport a lot ofthe poorest countries andemerging economies and the communities.Many of which didn't really contribute to this challenge.This was a developed world problem that iscausing it impacts in many of these countrieswhere they haven't yet had the benefits of growthand industrialisation or in some circumstances,whilst we've had that benefit in the developed world.And so therefore, the transitionreally needs to ensure that countries thatare facing the realities ofclimate change in their economiesare also given the supportand the financing to actually transitionthe difficult sectors to alternative energy sources.And so for us as a pension fund,we look at the way that we'reinvested in emerging markets.And we've been able to bringtogether a group of 12 UK pension funds with400 billion assets under managementwith, who serve 18 million UK pension holders.And our aim as a group really is tounderstand the needs of emerging economies,the practical ways in which we cansort of roll in behind the commitmentsgovernments are starting to makethat require finance from pension funds to flow in behindthe public money that started to beput on the table and reallyamplify and speed upthe transition that they have at the national level.And I think unless pension funds reallyapproach it through this lens of wanting tosupport countriesand emerging economies achieve their goals,then I think we're going to be be in real trouble.So I think this is a really good signalfrom a group of pension fundsthat want to get very practical, work withgovernments, work with countries,identify the ways that we canensure that we can invest in support ofthe transition in line withour investment approaches and fiduciary responsibilities.And presumably that's going to requirequite a new look at how we invest indifferent markets in termsof attitudes to risk or time-frames,or even market sizes, etc...So it's great that we're seeing a collaboration ofpension funds to really work through someof those thornier issues.Yeah.I think there's a lot of misconceptionsand part of this is going to be an effortof actually just bursting some, sort of,false bubbles that exist aroundthe challenges in emerging markets.It's also quite clear there's a verysignificant political imperative tohelp support countries like South Africa whohave a difficult energy system,which is fossil fuel-based, transitionfrom where it is today to where it needs to be.And that means therefore, you'vegot to hold the complexity.It's got coal assets at the moment that supportan energy system that doesn't have an alternative.There isn't a renewable switch that hasn't beenswitched on in South Africa, it's gotta be built.So how would you support that transition?How do you support the workersthat produce the coal that go into the energy systemtoday whilst you buildthe renewables capacity, transition through gas,and then have sufficient energy to enablethe South African economy to flourish andstop having the power outages its having today.So it's about owning all of that pictureand then playing a really constructive roleto drive the transition.My sense is the opportunities are there.I think it's about having a sort of intent amongstpension funds that they really want to play this role.Welcome in the fact that you've now gotgovernments putting money on the table.There's 8.5 billion from the UK, Europe,and US in support of the South African government.That acts as a sort of first loss.And I think the way is if we can package this assome blended finance kind ofapproach then I think there's opportunityto really support countries.And the prize here is if countries know that there'sreal finance coming downthe path to support them deliver their national targets.This in turn will help the whole international processand our collective achievement of the Paris Agreement.That sounds great, but at the same time,pension funds still haveto fulfill their fiduciary duties,And think about term to investors.So this is, this is not an easy one to crack.It's not, unless we can demonstrate that it is absolutely inline with the way that we're investing,then it can't, it won't work.So the challenge here is to be really clear,it is possible to invest in emerging markets in this way.And to be absolutely sure of that.I think if we can demonstrate that,then I think you will see many otherpension funds flowing behind.The opportunity with this group is really to dothat practical work andhave that confidence and assurance.And the aim is ahead of COP27 tobe in a position to say where we've got to. Yeah, great.You mentioned a couple ofother stakeholders in there and I'mkeen to understand your takeon what regulation can, can do tohelp accelerate this transitionbecause that's a key player.So any thoughts on that?Well, I think regulation is critical to the transition.First and foremost, it needs to be aligned to net-zero.So I think there's also the role regulation plays increating the rules of the gamein terms of the disclosure requirements.And in the UK, you've obviously got the government intendingto ensure that we havetransition plans that are mandatory.And I'm part of the task force that'slooking at, at what that looks like.So I think that's a really important rolefor regulators toplay in driving those kind of reporting,disclosure requirements, standardising it, etc....So I think all of that's essential. Equally,it's essential that the actual sort ofpolicy in sectors like aviation,shipping, steel, that that is alsoaligned to enabling companies and sectors to transition.And lastly, I think the interaction thatwe as investors have with policymakers,but also the way thatcompanies interact with policymakers,that there's absolute clarity thatthat needs to be aligned,that lobbying, that influencingof public policy, that needs to be aligned to net-zero.And so I think all of those aspects are essential.I'm encouraged by effortsto standardise transition plans,mandate them. As a pension fund,we're very keen to see that and play a rolein seeing that sort of very effective way.But you've also got to make sure that these plans areenablers of action by companies.Finally, one last question, if I may.If you were to have one wish to make COP27 a success,what one thing would you wish for?I hope that it isthe COP where countries go away from it,knowing that the finance is not just in multi-billionsort of headline commitments, it is practicallythere at the national level withgovernments with confidence knowingthat they are in a position to start todeliver their transition plans atthe level of ambition that I suspect they have.I think if we can achieve thatover the next six-month period,I think that'll be a reallyimportant part because that willbuild confidence in the whole international process.And know that you've got real transition,real-world emissions reduction plansstarting to come to life at the national level.So unlocking that and making it practical,making it real at the national leveland led by countries that really require it.I think that for me would be really important.Adam. Many thanks.Thank you.

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