The ageing effect: how demographics shape BTPS climate solutions strategy
Arek Zawada, head of investment solutions at Brightwell, discusses the scheme’s approach to climate solutions
The BT Pension Scheme (BTPS) is unique in more ways than one. The closed DB scheme with £35.7bn in net assets has a net zero target of 2035. That year has special significance for the scheme; nearly all of its members will retire by then. The average BTPS member, weighted by pension amount, is 71 years old today.
For Brightwell, which manages the scheme’s assets, these demographics significantly shape its capital allocation strategy for climate solutions. Arek Zawada, head of investment solutions at Brightwell, sat down with NZI to discuss Brightwell’s approach to climate solutions and the path to net zero 2035 for BTPS.
Trustee-driven
At the outset, it is worth noting that Brightwell does not have a dedicated climate solutions target. As a fiduciary that does not operate pooled funds, its targets and strategy are primarily shaped by Trustees.
“We've taken a slightly different approach to implementation in that we don't have a dedicated climate solutions target. It has to be a portfolio-wide approach”, says Zawada.
“We are ultimately very much trustee driven because we as Brightwell have our own views and we try to influence the trustees but, in the end, we don't run pooled funds”, he adds.
Lending and tilting
For BTPS, the scheme’s average age is the primary determinant of its capital allocation plan, not only in the context of its net zero target but also beyond it.
“An average age of 71, means we're going to be increasingly investing in credit. If you roll the clock forward by about 10 years, fixed income and credit will be a will be close to 100% of the assets of the scheme”, says Zawada.
“So we've got about £300-400m of typically private investment grade credit solutions, which tend to back renewable development. That's very much an area where we seek opportunities and expect to see more opportunities”, he added.
The appetite for credit solutions with a green tinge, however, does not translate into a policy for excluding the polluters.
“If you exclude, you undermine your chance of influencing change Supporting the transition does involve investing in in assets which today might have high emissions”, he says.
Lending influence
For lending instruments, the ability to influence change is linked to the financing structure – most notably in extent to which the cost of the loan is tied to its issuer’s emissions reduction performance.
In sustainability-linked bonds, for instance, this is where coupon step-ups come in. Zawada says these structures make a compelling case for change, but their material effectiveness might be low.
“A lot of the time we see pretty material KPIs missed and a small step up of 15-25 basis points”, Zawada said, noting that in the case of an investment grade corporate bond, the material consequence of missing targets needs a far higher magnitude of step ups.
In addition to corporate bonds, such financing structures also feature in the schemes’ direct lending investments where they take the form of margin ratchets.
“The other area we spent quite a bit of time in our private markets portfolio is direct lending where margin ratchets are one of the tools some of our peers and managers have been using”, Zawada told Net Zero Investor.
Infrastructure holdings
Fixed income aside, BTPS also invests heavily in infrastructure assets. According to its latest TCFD report, its infrastructure portfolio experienced a gross emissions reduction of 23% since 2020.
The reduction, Zawada says, reflects not only a growing appetite for renewable energy infrastructure but also a fundamental reduction in the emissions intensity of existing assets.
“Most of the change you see there is natural reduction in emissions of the underlying assets. We already have incremental new allocations to renewables, but most of it really comes from decarbonization of existing assets”, he says.
Zawada is optimistic that the opportunity set in green infrastructure is growing. Compared to the past, when renewable energy production was the mainstay of such portfolios, today the investment universe is changing.
Renewables 2.0, he calls it. “So not just energy production and development of solar and wind energy but also systems that manage the flow of that energy”, Zawada explained.
For investors too, he says, things have changed. Such assets now fit into asset owner return expectations, a piece of the puzzle that was hitherto missing.
“A lot more opportunities now hit the return target”, he said, “We have seen very clear evidence of climate improving returns”.
Headwinds
An expanding investment universe with falling emissions and rising returns, however, does not guarantee their delivery. For one, that outlook is now facing hefty headwinds from Washington DC.
““I think the main one is what's going on in the US. As we saw with Orsted, the Trump administration changing regulations overnight I think is the biggest risk”, Zawada warns.
Political risk aside, he points out that returns often come down to valuations. “We think there are strategic opportunities in the energy transition theme but there will be winners and there will be losers. In our view, it is important to be mindful of valuations as you are with any other investments”, he concludes.
