Incorporating sustainability-themed investments in our DC ethical investment options
We’ve updated USS’s Investment Builder ethical investment options to incorporate a more explicit focus on sustainable investing.
The Investment Builder is the defined contribution (DC) part of USS, and works alongside our Retirement Income Builder – the defined benefit (DB) part – to create a hybrid pension.
All members of USS are part of the Retirement Income Builder, the DB part of USS – where the benefits are defined (including a guaranteed income for life in retirement and a tax-free lump sum, among other benefits).
Members who earn more than a specific threshold, make additional contributions, or transfer in funds from another pension scheme will also have savings invested in the Investment Builder – the defined contribution (DC) part of USS, where the contribution is defined (but there are no guaranteed outcomes).
We have a fiduciary duty to ensure that the benefits promised to members in the DB part of USS can be paid when they fall due. Trust law also requires that best financial interests of members and beneficiaries must be our over-riding consideration when it comes to deciding how, and where, to invest the scheme’s money.
What is the Investment Builder ethical offering?
Legally, there is more flexibility in relation to DC investment decisions. So, members with Investment Builder savings can choose to invest in funds we offer that may reflect their personal beliefs and preferences (accepting any potential impact on financial risks and returns).
At USS, we recognise the importance of giving members the opportunity to invest in line with their values where possible. This is why we offer ethical investment options – the Ethical Lifestyle and the Ethical Equity Fund – designed to reflect, to the extent possible, the diverse preferences of our members. These options are shaped through regular feedback and surveys, to help us better understand which sectors or activities some of our members would prefer to exclude from their investments. The Investment Builder (DC) Ethical Guidelines explains these in detail.
A member-led approach
We are committed to ensuring that our ethical investment options consider different members’ values but we know we cannot always meet everyone’s needs. Everyone’s own ethics are personal, and it’s not feasible for us to offer members the ability to choose exactly how their funds are invested. But we put a lot of effort into understanding our members’ views. That’s why we regularly engage with sample populations from USS members, seeking feedback and refining our approach over time. Reflecting these member preferences may result in the investments being more constrained and less diversified than the ones in the default investment option, which all else being equal may have an impact on risk adjusted returns.
What have we changed in the funds?
Alongside not investing in companies involved in certain activities (as far as practicable), we know some members are interested in investing with the intention of generating a positive, measurable social and/ or environmental impact. In April 2024 we introduced a sustainability-themed equity investment in the Ethical Lifestyle and Ethical Equity Fund. This investment goes beyond excluding companies or sectors to avoid certain harms or negative impacts, to actively look for investment opportunities in environmental solutions that seek to contribute to positive, real-world change, as we explain below, all while complying with the Investment Builder (DC) Ethical Guidelines.
What is the new sustainability-themed equity investment?
The new investment is a bespoke arrangement for USS managed by Impax Asset Management, complying with the Investment Builder (DC) Ethical Guidelines, and is a significant step forward in our commitment to delivering ethical investment options that align with some members’ values. Alongside its financial target of achieving above equity market returns over the longer term, it also focuses on investing in companies that aim to provide innovative solutions to environmental resource challenges where at least 20% of their underlying revenues are generated by sales of products or services in environmental markets. Among companies in the portfolio, this revenue percentage is typically much higher; according to Impax, as of end September 2024 it was around 50%.
It invests in companies that seek to address long term sustainability themes – such as resource scarcity, population growth and rising living standards – that stand to benefit from the transition to a more sustainable global economy. These companies aim to offer practical, sustainable solutions in areas such as sustainable food & agriculture, water treatment & efficiency, and waste management, all of which are increasingly critical as global demand grows and resource constraints start to bite.
Real-word case studies of companies making a difference and delivering investment returns
Impax has provided the examples below as case studies of companies that are developing what aim to be innovative solutions to environmental challenges. Impax invest in these companies at the time of writing.
Applied Materials, Inc. develops, manufactures, and services equipment and spare parts for use by the worldwide semiconductor industry. Its products aim to reduce greenhouse gas emissions for semiconductor manufacturing through improved energy efficiency, such as emissions measurement systems, pollution abatement equipment, and energy efficiency consulting services, according to Impax. As described by Impax, the company directly contributes to semiconductor efficiency and enhanced digital productivity, which are key for the transition to a more digital and sustainable world, by providing solutions which help users mitigate the negative environmental aspects of semiconductor manufacturing.
Trane Technologies is a building energy efficiency company offering heating, ventilation, air conditioning and refrigeration solutions. Buildings account for roughly 30% of global energy consumption (source: International Energy Agency), of which roughly half is for heating and cooling which represents the majority of direct fossil energy use in buildings. Trane helps building owners manage energy costs while enabling a reduction in carbon emissions. Since 2019, 157 million metric tons of carbon dioxide equivalent was reduced from Trane’s customers’ carbon footprint, according to its 2023 ESG report. Trane has a further goal of reducing 1 gigaton (1 billion metric tons) of carbon emissions from its customers’ footprint by 2030.
These companies, along with others in the Impax portfolio, illustrate how some investments cannot only aim to benefit members financially but also aim to contribute to a more sustainable global economy, all while complying with the Investment Builder (DC) Ethical Guidelines.