Merseyside Pension Fund, Liverpool, England, selected FTSE Russell's Smart Sustainability index as the benchmark for a portion of its passive equity portfolio that will have a multifactor approach focused on climate risk, said Owen Thorne, investment manager at the £9 billion ($11.8 billion) pension fund.
The new benchmark will be used for a third of the pension fund's £1 billion passive equity portfolio.
"This (index) helps us to move into a smart beta solution (to counter) the concentration risk within the market cap. We are looking to tweak our market cap weighting with (a) multifactor (approach) with a specific objective on the climate side. … Increasing exposure to green revenues to widen (the) opportunity set, will, in the end, give us better exposure to a risk premium," Mr. Thorne said, speaking to Pensions & Investments in an interview at the annual Pensions and Lifetime Savings Association conference in Liverpool, England.
"We think (a) climate and multifactor (approach) is more risk-efficient overall," he said.
"(FTSE Russell) had a unique offering around green revenues," he added. Mr. Thorne said Merseyside has an ongoing relationship with FTSE Russell. "We have been using FTSE Russell within our strategic benchmark and a range of indices for our passive portfolio. We are already using FTSE Russell All Share indices as well as (the firm's) fixed-income indices," he said.
The selected index provides broad exposure to the target equity universe of the FTSE All-World index and incorporates climate-change considerations, including carbon efficiency, fossil-fuel reserves and the green revenues of constituents.
The move to the climate strategy is to align Merseyside's responsible investment policy and activities with the goals of the 2015 Paris Agreement, a news release said.