Keith Guthrie, head of UK sustainability at Now Pensions: “I prefer sustainability to ESG.”


21 Mar 2024

The head of UK sustainability for Now Pensions and Cardano talks to Andrew Holt about making a real impact, the systemic challenge in addressing sustainability and learning the lessons of collaboration.

The head of UK sustainability for Now Pensions and Cardano talks to Andrew Holt about making a real impact, the systemic challenge in addressing sustainability and learning the lessons of collaboration.

You took up your new role in December, but you came from within the organisation. Despite knowing the operation, how would you describe the first few months?

Intense is the word I would choose. There is a lot going on and I took this role on because of that. It is an opportunity to add value in sustainability, not only just in the context of Now Pensions, but also in the wider industry, where there is an opportunity to influence organisations and individuals to have clearer thinking about how to tackle sustainability.

I am very much a first principles person. That is what I like doing.

What are your ESG and sustainability priorities?

There are quite a few things on the go at the moment. There is a lot of industry reporting and development around the Task Force on Climate-related Financial Disclosures. That is more the reporting function. What I want to focus my efforts on are where we can get up close and make a difference.

In the case of Cardano, it is working with all the different defined benefit pension funds we operate with. In the case of Now Pensions, it is working with the trustees on the on-going development of their sustainability efforts. What can we do in the portfolio that will improve member outcomes? The foundations are there already.

How do you view the Now Pensions approach to sustainability?

The trustees are engaged. That makes my job a lot easier. Their belief in sustainable investment needs to be tackled from financial risk and real-world impact perspectives. Having clarity of both in our investments is an important connection. That is at the heart of what I believe is how sustainability should be done. It is where much of the industry gets it wrong, because it is usually about the risk perspective, which isn’t terribly helpful.

Does the industry get lost on the real-world impact?

Few organisations set real-world impact as an objective. Therefore, they can end up getting themselves in knots. There is a lot of tick-box exercises going on.

How can that change?

I hope more will adopt a dual mandate. We define it as assisting in the transition towards a more sustainable society – which comes with all the environmental and social issues. That is how we define our real-world objective.

How central is sustainability to Now Pensions’ investment approach?

It is hugely central. It has grown over time. We run the whole portfolio on a sustainable basis. The trustees then decide which portions of the portfolio have a specific sustainable objective – that is about 82% of the portfolio.

About 17% of the portfolio is made up of green bonds, while the equity portion has a growing allocation to green strategies.

Now Pensions has identified three sustainability priorities: climate action, the living wage and gender equality. Why are they so important?

Those are the trustees’ themes and objectives and tied to our membership because it will make a difference to their lives. Two are social – the gender equality and the living wage – and then the climate focus, which we approach quite broadly.

Biodiversity feeds massively into climate. In our equity mandates there is a focus on deforestation and engaging businesses on the issue. The trustees have signed up to the PRI’s Spring initiative, which is around deforestation.

What is the biggest challenge for investors who are committed to sustainability?

It is around how to do it well. People always say there is a lack of data. In some areas there is, but in others it is a lot better. You use what data you can. But you cannot stop data from making sure you have an influence and doing the right thing on sustainability.

One challenge is governance, in that you want to make sure the managers are aligned with the trustees and their beliefs. And on stewardship, it is about being part of the right alliances to do the right sort of engagements.

The relationship between Now Pensions and Cardano is reasonably unique. What, for you, are the benefits and flaws of such a relationship?

It is unique. The benefits have been in the ability to align what the trustees are looking for with what is executed. We have spent a lot of time understanding the trustees and what they are looking for.

A strength is the strong independent governance where the trustees have their own independent advisers. This creates a good dialogue. We worked together on measuring the decarbonisation in the portfolio by putting in place a framework that monitors how that is going versus the broader market.

It is also what I can bring to the role. I have a lot of experience with the group and I sit between the businesses. I need to know what is going on from an operational perspective and present to the trustees that side of the business.

Is there any time when there is conflict, where Cardano wants to do one thing and Now Pensions something else?

What we are cautious of is having good governance in place. If there are decisions where there is a conflict of interests, then Cardano leaves the room and the decision is made by the Now Pensions’ trustees. So it is clear how potential conflicts are resolved. But it hasn’t come up as an issue. Now Pensions works well with Cardano, the advisers and trustees.

Is the relationship therefore like an outsourced chief investment officer (OCIO) relationship?

You could say it is a bit like an OCIO. It is definitely an asset manager relationship. Cardano is not the adviser but works closely with the Now Pensions’ trustees to devise the investment phases. And the trustees are very much engaged, particularly when it comes to sustainability. They challenge what we are doing in this area. Cardano has the responsibility of appointing the asset managers. The trustees don’t have that responsibility, but don’t shy away from asking questions about it.

Cardano is also focused on impact in the portfolio. That involves engaging with third-party asset managers to up their standards. There are also in-house teams at Cardano managing assets directly ac- cording to the sustainability standards set.

And those sustainability standards are set by Cardano?

It is double layered. Cardano has its own sustainable investment policy. This drives its internal strategies. Now Pensions appoints Cardano to manage the assets, which are managed in line with Cardano’s policy. Now Pensions’ trustees then add their sustainability priorities, and it gets implemented by the Cardano team.

The term ESG has come under criticism of late. Do you understand those criticisms?

It has become a real hot potato, particularly in the US. It has stopped being a description of investment risk assessment and has become a political term. I prefer sustainability to ESG. Our trustees believe sustainability is about the transition, not just about focusing on companies that are not truly green.

We have a large proportion of the market that has a negative impact on the environment and we need to figure out how it gets positive: things like airlines and cement companies. These companies are not going to disappear.

What we need to do is work together with them towards what a good transition plan looks like. So thinking about sustainability when investing across that spectrum.

Where does this leave ESG?

We may have an explicit bifurcation in the market, between investors who only have a financial risk ESG objective and investors who say the impact is more important.

I hope more and more of the market adopt that second approach. The real impacts are systemic and matter to long- term outcomes.

What has been the biggest change in how investors approach sustainability during your time working in this area?

It started o as a risk integration problem. But the biggest change is understanding that these issues are systemic. They are bigger than just being tackled at a company level. Governments have a huge role to play.

I also think collaboration has grown and individuals and organisations are figuring out how to do that better.

You mentioned the importance of government, how do you view the various initiatives from government and supranational bodies when it comes to sustainability?

Government has a huge role to play. They regulate industries, which is interconnected to sustainability. For investors the key challenge is that we are investing over the long term, which is why we take the systemic approach over the long-term risks we are exposed to.

What is important as an investor is: where I am investing? Do I understand the rules of the game? So what is important is that government keeps a level of consistency in its approach. If things change, you understand the impact on the risk premium. So government needs to give certainty of trajectory on sustainability.

What did you make then of Rishi Sunak and Keir Starmer backtracking on their ESG commitments?

That backtracking creates uncertainty and increases the risk and cost of making sustainable investments. But we have to also work within an economic reality. What is unhelpful is the mixed messages on the trajectory of travel.

Why is sustainability so attractive to you?

It has been a wonderful journey for me. I have, as I said, always had a first principles approach in how to figure out how I can make a real difference to our business and contribute to the world. There is still a lot of thinking that is still unclear and therefore there is a lot I can contribute.

Where do you aim to take Now Pensions on the sustainability front?

We have done a great job. We had a strategy review over the last year to push sustainability in all parts of the portfolio. There are parts of the portfolio where it can go further. We have been talking to the trustees about impact investing but haven’t worked out yet how to do that.

The cool parts of the portfolio are the green bond investments. The equity investments needed substantial change after the review. The equity portfolio now has real-world impact at its core, but we need to think about how to push it further.

What has been the biggest lesson you have learned in your career?

If I look back on my younger self it would have been to understand the collaboration aspect earlier. I was like, ‘I am smart enough to do this myself’. And that then becomes an appreciation of the team I am working with.

Mental health is also important to me. So a real appreciation that this not just a numbers and mathematics game, it is a real-world game, or not even a game, its people’s lives.


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