USS Investment Management, the investment arm of £68bn university pension scheme USS, has for the first time pledged to divest from some controversial sectors.
USS has committed to exclude tobacco manufacturing, thermal coal mining and cluster munitions as well as white phosphorus and landmines from its portfolios over the next two years.
The move is a significant turnaround for the scheme, which while being an active shareholder has historically been sceptical of a blanket ban on certain products.
USS’ head of responsible investment, David Russell, argued in 2018 that the scheme’s trustees were obliged to “invest in the best financial interests of its beneficiaries”. Therefore, because of the size of the scheme, a blanket ban on certain sectors would not be feasible.
USS said that this move was part of a broader change in understanding financial risk, as changing political and regulatory attitudes could damage the prospects for business in these industries.
The recently amended requirements for the Statement of Investment Principles, and the PCRIG guidance on TCFD reporting, to which Russell contributed, are indicators of the increased regulatory focus on ESG investing.
According to Ethics for USS, a USS member-led campaign group supported by Share Action, the scheme currently has £1bn in fossil fuels. It also has £400m invested in tobacco and £200m in arms manufacturers.
USS did not provide a detailed list of companies it is divesting from but a gloomier financial outlook for some controversial stocks could have influenced this change in its decision making.
British American Tobacco, the UK’s biggest listed cigarette company, is one of the largest dividend payers in the FTSE100 and is still included in many other pension scheme portfolios. But the scheme said the decision was made by considering the long-term impact financial of certain holdings. USS manages 75% of its assets in house, making it easier to opt out of certain sectors, USS chief executive Simon Pilcher said.
While tobacco and thermal-coal manufacturers are relatively easy to identify, the production of cluster munition, white phosphorus and landmines is harder to track down and often takes place via subsidiaries.
The production of white phosphorus is not outlawed because it has other legal uses. Yet some institutional investors have taken a stand and have placed BAE Systems on their exclusion list due to it making smoke bombs that contain white phosphorus.
Andrew Smith, a spokesperson for Campaign Against Arms Trade (CAAT), welcomed USS’ decision: “This is an important statement and sends a clear message, we hope that others will follow.
“Looking to the future investors should also reconsider if they are comfortable investing in the arms trade more generally. Whether it is bombs, tear gas or missiles, these other weapon types are also doing a great deal of damage.
“Investing in companies offers them financial support and legitimacy,” he added.