As Avon’s commitment to illiquid renewable infrastructure requires it to hold more liquid assets, the fund is working with asset managers to create better low-carbon asset allocation options.
Avon Pension Fund, a UK-based local government pension scheme (LGPS), has started greening its cash investments, and is working with financial institutions on developing low-carbon derivative-based strategies, to ensure all its investment management strategies align with its net zero commitments.
The move is relatively innovative in the pension fund world, and potentially hugely important as organisations deepen their net zero activity.
An NGO report last year said that for some large corporates, cash holdings and liquid investments possess a carbon footprint much larger than their current Scope 1, 2 and 3 emission calculations combined. For some of the world’s largest companies, including Google, Meta, Microsoft, and Salesforce, their cash holdings are their largest source of emissions, found the report, increasing total emissions by 91-112%, when compared to most recently reported emissions.
However, accounting for the carbon emissions of cash is currently very difficult. The NGO research had data gaps, meaning its figures could be a large underestimation.
Eric Huttman, CEO of FX marketplace, MillTechFX, told ESG Investor it has done research into tracking the carbon footprint of each dollar its clients trade but the process will be “very difficult”.
“Within an over-the-counter market that US$1 touches loads of different points external to your environment. So, it’s very difficult to track the carbon usage of that dollar traded through the banking ecosystem. But it’s high on our agenda.”
Avon Pension Fund, which manages £5.5 billion, is committed to reaching net zero by 2050 or earlier. As part of this commitment, it has already invested £1.4 billion in sustainable and Paris-aligned equities and has over £400 million committed to renewable infrastructure.
Speaking to ESG Investor, Nathan Rollinson, Investments Manager, Avon Pension Fund, said its sizeable allocations to illiquid renewable infrastructure requires it to have a high percentage of cash at hand.
“That was the starting point for us. We set a challenge for our asset managers to go away and do some thinking in terms of our cash holding that is consistent with our end goal of net zero by 2050.”
Liquid ETFs
Avon’s commitment to renewables are via closed-end fund structures which draw capital over time as opportunities arise, often at short notice. Capital is often required at short notice and holding cash in advance is sub optimal from a returns perspective.
Avon worked with BlackRock to design a basket of highly liquid ETFs designed to track its overall asset allocation, including its £500 million strategic allocation to Paris-aligned equities.
It routinely monitors the ESG score, carbon intensity and implied temperature pathway of this liquidity strategy to ensure it continues to deliver in line with our overarching climate objectives, he said.
There is also a requirement to hold some cash in the portfolio. Last year, Avon became an early adopter of liquid environmentally aware cash funds which employ both positive and negative screens and commit a portion of fees generated to actively acquiring and retiring carbon offsets.
Going forward, Rollison said Avon was looking to deepen its net zero investment strategy by working with the industry to develop asset classes that are less well evolved in this area. This includes low-carbon derivative strategies. In time it will also consider making an allocation to green gilts as part of its LDI [Liability Driven Investment] portfolio and as issuance increases.
“We want to work very closely with the asset management industry to add capacity so we can continue to invest in line with our climate objectives and ultimately deliver on our pensions promises which is our legal obligation,” he said.
