Nest threatens to freeze investment in firms failing on net zero

Nest, the £45 billion state-backed pension scheme, has said that it could freeze investments in companies that are rowing back on or failing to meet their net-zero targets.
Katharina Lindmeier, senior responsible investment manager at Nest, said that momentum in corporate commitment to sustainability goals had stalled in the past two years and in some cases had reversed.
“We’re in a slightly difficult position as an industry: where do we go from here?” she commented in a report by the research organisation the Defined Contribution Investment Forum.
“We don’t necessarily want to divest — it isn’t going to change anything — but realistically, how many more levers do we have if we’ve already voted against shareholder resolutions? Companies are just not listening to us.”
Nest, also known as the National Employment Savings Trust, is the default pension fund used by 13 million low and middle-income workers. Thanks to the introduction of auto-enrolment in workplace pensions, the scheme has ballooned into a huge investment institution, managing more than £45 billion of retirement savings.
Pension funds’ divestment of stocks in certain sectors, such as mining, oil and gas or arms manufacturing, has drawn criticism from some, who think funds’ priority should be making money for their investors.
“Diverting focus from financial returns to environmental targets risks undermining the financial security of future retirees,” Matthew Lesh, public policy fellow at the Institute of Economic Affairs think tank, said.
“Nest members already have the option to select an Ethical Fund if they wish to pursue environmental objectives. For the majority, Nest’s primary responsibility is to maximise retirement savings, not to advance politicised agendas.”
A spokesman for Nest said the scheme may not fully divest but “freeze” its holding in a company as a last resort. This means that it would not put more money into the business, even as its assets under management rise.
Nest has already sold out of businesses that it thinks do not engage enough on environmental issues. In 2021 it sold all its shares in five energy companies, including Exxon Mobil, America’s biggest oil and gas company. It said that Exxon had failed to demonstrate that it was transitioning towards being a low-carbon business.
It does still own companies in the oil and gas sector, including the US-listed Chevron and London-listed Shell. It says that it engages with businesses such as these on how they can help the transition to a low-carbon economy.
The scheme also sold all its shares in tobacco companies a few years ago after concluding that cigarettes were going to be “regulated out of existence”.
Lindmeier added that engaging with companies on net zero was its first port of call, followed by a shareholder vote and then a shareholder resolution. In 2018 the scheme supported a shareholder resolution at Shell that asked the company to set greenhouse gas intensity targets in line with the Paris climate goals.
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Nest is aiming to reach net zero by 2050 and achieve a 30 per cent reduction in scope one and two financed emissions in its public stocks and bonds portfolios by 2025, from a baseline set in 2019. Scope one and two emissions are emissions directly related to their operations and processes and to the purchasing of energy from third parties. A 50 per cent reduction by 2030 is expected to be more challenging, Lindmeier said. “Now that a lot of the low-hanging fruit have been plucked, to achieve that target, it means that our underlying assets need to decarbonise, or we’re going to be forced, potentially, to restrict quite a lot of what we invest in.”
In the past five years Nest’s ethical growth fund has delivered a cumulative return of 36 per cent. Its 2040 retirement date fund has returned 40.4 per cent over the same period, while its higher-risk fund has returned 43.4 per cent.