The schemes – that represent more than £26bn in assets – are seeking views from fund managers on ways to invest in alternative asses classes such as forestry. The schemes said depending on the way the investment strategy in the asset class is pursued, strong returns are available.
Many institutional investors are exploring whether this type of asset class could improve risk-adjusted returns and environmental impact, with Nest and Cushon looking at the best ways to implement from both return and cost perspectives as well as ESG considerations.
The investors are asking fund managers to consider managing investment risks, the impact on biodiversity and management of forestry risks such as pests, fire and wind, how costs would fit within each scheme’s own existing charge structures, the impact it can have on a portfolio’s carbon footprint, and what certifications are used when verifying carbon credits, and the level of certainty this can provide investors.
The schemes want to select fund managers that share their values and will scrutinise each investment opportunity, avoiding markets where timber is a cause of deforestation.
Nest chief investment officer Mark Fawcett said: “Nest is building a diversified portfolio for the benefit of our members and believe this could be a rewarding investment opportunity – we’ve never accepted that any type of investment should be out of reach for our members.
“Forestry’s historical risk and return profile may make a compelling argument for a strategic allocation. Any investment should only grow in value as greater importance is placed on natural capital and the carbon removal and offsetting industry develops.
“We’ve started our market warming and I’d encourage fund managers with experience investing in forestry to get in touch, outlining how schemes like Nest and Cushon could enter the market. One challenge we’re conscious of is making investments at scale in this space – we’ll need to explore with managers how much money they can actually put to work in timberland on an annual basis, and how much it will cost.
“Fund managers are starting to realise defined contribution pension saving is the future in the UK. We’ve already invested into asset classes previously thought out-of-reach, such as private equity, and we’re excited to hear about the new opportunities we could offer our membership.”
Cushon scheme strategist Julius Pursaill added: “Both Cushon and Nest believe that climate change represents a material threat to members’ future returns. Cushon already allocates to natural capital in its default fund. By expanding this allocation, Cushon seeks to further mitigate the effects of transition risk on its default fund via an asset that is positively correlated with the price of carbon because of its sequestration capacity. Every Paris aligned pathway requires a significant increase in sequestration capacity. Natural capital-based carbon sequestration is key to limiting future temperature rises.
“Australian “supers” [the equivalent of UK master trusts] have already delivered value for members via joint investment mandates. Where asset classes are difficult to access because they are illiquid, joint mandates can deliver the benefits of both lower costs and better diversified portfolios from outset. Cushon wants to bring those benefits to the members of UK master trusts.
“This requires a wide conversation. UK pension providers have an opportunity to deliver sustainable investments for members thanks to natural capital – in both an environmental and financial sense. We want to hear from fund managers about how best to invest in forestry, how best to manage risks for our members, and mitigate biodiversity and forestry management risks.”