Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Australian, UK pension funds join forces for renewables push
Australian super funds like Aware, Hostplus, Cbus and Rest have joined forces with IFM Investors and a host of British pensions to push the UK’s new government to implement pro-investment policies across finance, planning, renewable markets and industrial decarbonisation.
The funds’ central recommendation is that the Starmer government create more clarity around the roles of the new Great British Energy and National Wealth Fund and adapt the rules for calculating public sector net debt to account for investment in productive assets made by those two organisations.
Great British Energy, a publicly-owned clean energy company, should have “clearly defined commercial objectives” so that it can partner effectively with pension funds; and the National Wealth Fund, the UK’s “sovereign backed green catalytic fund” should be focussed on supporting commercial development of higher risk net zero industries.
“Mobilising pension fund investment has the potential to create benefits for society, but quite rightly, pension funds have a fiduciary duty and must only invest in their members’ best interests,” said IFM executive director Gregg McClymont. “This world-first collaboration between some of the UK and Australia’s largest funds maps out how the government can accelerate the energy transition and deliver strong returns for working peoples’ retirement savings.”
“There are a number of steps to unlocking this investment. But a pre-requisite is that the government should account for infrastructure assets more like a long-term investor, and less like a commercial bank holding equity as loan collateral to be sold in a fire sale.”
The Starmer government has made clean power by 2030 one of its central priorities, and wants to double onshore wind, triple solar power and quadruple offshore wind over the next years, with the expectation that domestic and international pension funds will play a major role in financing it.
Among a host of other recommendations, the funds also want the government to extend contracts for difference terms for renewable and low carbon power generation to reflect longer project lives and unlock a lower cost of capital; improve physical and regulatory integration between the UK and EU energy markets to support “harmonized, tariff-free trading and two-way flows of energy”; and prioritise the development of business models and markets for hydrogen and e-fuels.
“As a large global institutional investor, Aware Super can offer economies, including the UK and Australia, a valuable source of long-term and sophisticated capital to help meet Net Zero Emission targets,” said Aware Super CEO Deanne Stewart.
“These opportunities are also a key contributor to the retirement futures of our 1.1 million members – which include nurses, teachers, police and other essential workers. The enormous scale of energy transition and need for private sector capital should enable appropriate opportunities for generating strong, risk-adjusted returns for their investment portfolios, as well as strengthening the communities in which they live, work and retire.”
On the UK side, the coalition is made up of Border to Coast Pensions Partnership, LGPS Central, Nest, North East Scotland Pension Fund, the Pensions and Lifetime Savings Association, and Universities Superannuation Scheme. From Australia comes Aware, CareSuper, Cbus, HESTA, Rest and Hostplus.
Australian superannuation funds have been steadily increasing their investments in the UK as they look for differentiated infrastructure investments, with a number of funds having now established London offices to support their efforts.
