Paving the way

How Nest invested your money responsibly in 2019

nestpensions.org.uk

Investing your money responsiblyAs a member of Nest, you’re putting money away for your future. That means growing your pension savings over many years, if not decades.

We want the companies and industries we put your money into today to continue to make money for you tomorrow. We also want them to contribute towards the future you want to retire in.

We believe our approach isn’t just better for your pocket – it helps people and the planet we live on too.

How does Nest invest my pot?We take environmental, social and governance (ESG) issues into account when deciding where to put your money. This helps us decide how adaptable a company or industry is and how sustainable their profits will be in the years to come.

GovernanceThis deals with how well a company is run. It covers topics like executive pay,

company board structure, bribery and corruption, transparency and taxes.

SocialThese issues cover

working conditions, child labour, the impact an

organisation has on their local community and

human rights.

EnvironmentalThis includes things

like pollution, climate change, deforestation

or a company’s carbon footprint.

What are ESG factors?

Factors like corruption, being a heavy polluter, or having unsafe working conditions might not affect how profitable an investment is right now, but it will affect it in the future. It’s our job to take that long-term view on how to protect your savings.

However, safeguarding your future isn’t just about your pension pot. It’s also about something more valuable than money - and that’s the world you live in. We want you to be proud of the investments made with your money on your behalf.

We’ve worked to tackle climate change. We’ve sought out opportunities in new markets and reduced investment in highly polluting ones. We’ve worked with policymakers to raise standards across our whole industry. And we’ve done much more besides.

What happened in 2019?

In good conscience, we cannot stand by and do nothing – we want to help ensure the world our members retire in is a world they want to live in.

Diandra Soobiah, Nest’s Head of Responsible Investment

Nest goes greenIn 2019, the EU declared a climate emergency. Climate change is – quite literally – a hot topic. Companies must now change their practices and strategies to ensure they can thrive with minimal carbon output, or they’re likely to face large fines, increased regulation and bans that could lead to financial ruin.

We want to keep your investments safe from the negative impacts of climate change. That’s why we’ve invested a proportion of our members’ money in our Climate Aware Fund (CAF) since 2017. We designed it to drive more money into green technology and renewable energy while removing investment from the biggest greenhouse gas and carbon emitters.

The amount of money in the Climate Aware Fund

Has been pulled from high greenhouse gas-producing companies and put into businesses that are tackling the challenges of a low carbon economy.

£203.7m

£600m

£1

Taking 44,180 cars off the road each year

Stopping 23,557 tonnes of waste going to landfill

Powering 10,133 homes for a year

That’s something we can all be proud of.

Your money in the CAF is broadly invested in the same companies as in the FTSE Developed World Index, but with less going into high carbon emitters and more into greener companies. This shift in investment is the equivalent to:

Climate Action 100+We continue to put pressure on the companies we put your money into, encouraging them to follow the UN’s Paris Agreement. We’re proud to join Climate Action 100+, a group of investors around the world who lobby the biggest greenhouse gas offenders to take the action needed to curb emissions. It’s been recognised as one of 12 key global initiatives to tackle climate change.

Introducing private credit As the UK’s largest workplace pension scheme, we use the collective power of our members’ money to find ways to build up your savings that other schemes can’t. This year we moved into private credit, offering loans to businesses, infrastructure and commercial real estate projects. We’re one of the only auto enrolment schemes with the size and scale to do this.

Taking on these new investments helps us grow your money while making sure all your eggs aren’t in one basket. It also means we can put your funds into sectors that benefit the environment and society. We plan on channelling cash into positive impact projects like affordable housing, local hospitals, railways and renewable energy providers.

In 2019, your money was put into a range of projects including:

That’s just a start. We have many more projects lined up for 2020. And we’re working with our fund managers to measure the positive effect your money will have on the environment, on communities and on the world we live in.

€18 million in a solar energy plant in Italy and €20 million in Spain

€30 million invested in solar and onshore wind projects in France

Nest will have zero tobacco stocks in our investments

Stubbing out tobacco The tobacco industry was a solid bet for investors for many years but came with significant health and social issues to the wider public. After a rise in health concerns and government regulation in countries around the world, global smoking rates have fallen dramatically. This fall in demand and sales means the sector faces a bleak financial future.

All in all, we don’t think it’s a good long-term investment for your pension savings and are currently selling off all tobacco investments across our entire portfolio.

E-cigarettes

As smokers have become more health-conscious, they’ve turned to vaping. Most tobacco companies are developing their own e-cigarettes as a potentially profitable replacement for falling cigarette revenues.

We’ve carefully considered whether e-cigarettes are a viable product alternative given their healthier image and the wide range of flavours available that make them attractive to a younger market. However, vaping already faces regulatory pressure. The World Health Organization has advised countries to ‘consider banning or restricting advertising, promotion and sponsorship of electronic cigarettes’, most likely because we don’t yet understand the long-term health effects.

The e-cigarette market is highly competitive and fragmented compared to tobacco, where the market is dominated by a small number of companies. And unlike the high returns made on cigarette sales, many e-cigarette manufacturers are still making losses. So even though tobacco companies are trying to replace cigarettes with their own nicotine alternatives, we’re pulling our investments in the industry.

Tobacco is a struggling industry which is being regulated out of existence.

In-depth report conducted on the tobacco industry

E-cigarettes rejected as a sustainable, alternative product to invest in

2020

2021

2019

2019

2018

Decision made to stop investing in

tobacco

Tobacco stocks stripped out from

the portfolio

Nest’s withdrawal from the tobacco industry

Mark Fawcett, Nest’s Chief Investment Officer

Your money, your say Money speaks. And with over £10 billion of members’ savings under our management, it’s our responsibility to ensure it speaks in your best interests. As big investors, we use our weight to vote at company meetings for policies that are in your favour.

We truly believe that if Nest and other pension providers use our collective power, we can make sure your money has a say in the decisions of national and global corporations. We voted for 3,000

shareholder resolutions this year. These are some of the

things we’ve taken a stand for.

Independent, unbiased company

audits

Climate Change

Female representation

in senior management

Better health and safety standards

A fair living wage for

all employeesReducing

excessive pay packages

for executives

We believe in the living wage

Staff should be paid a fair day’s wage for a hard day’s work, otherwise known as the real living wage.

By increasing motivation and loyalty, it helps businesses become more productive. It’s also in the best interest of many of our members who make up a large part of the UK workforce.

What we didWe co-signed letters to UK companies that aren’t accredited by the Living Wage Foundation, a charity that recognises businesses that pay their employees the real living wage.

We asked companies including Vodafone, property developer Bellway, UK water company SevernTrent, engineers Smiths Group and United Utilities to pay their workers fairly and join the 5,000 Living Wage employers across the UK.

What happenedThanks in part to investor action, we’re pleased that Smiths Group have stepped up to become Living Wage accredited.

We believe in fair pay

Company bosses need to consider their workers when deciding how much executives are paid, including their pensions.

What we didWe voted for executive pension rates to be brought in line with the rest of the company’s staff at property developers SEGRO, pharmaceutical company AstraZeneca, and Daimler, who owns automotive brands including Mercedes-Benz and Mitsubishi.

What happenedWe’ll be monitoring them closely and will continue to put pressure on them over the next year.

We believe in workers’ rights

The most valuable part of any company is their workers. That’s why we want to ensure they’re treated fairly. More than that, our members make up a significant part of the UK workforce. Any improvement in general working conditions is likely to benefit our members.

What we didWe co-signed a letter to Amazon about labour rights in their organisation. We invited them to carry out human rights impact assessments and share proof of how they follow the UN code of conduct.

We also wrote to companies that haven’t completed the Workforce Disclosure Initiative. This yearly survey asks companies for information, covering everything from pay and workers’ rights to health and safety. It’s vital in helping investors like us understand how companies manage their workforce in order to assess whether there are any risks or opportunities in their operations, and how well a workforce is treated.

What happenedIberdola, a utility company who owns Scottish Power, responded to our request for them to complete the Workforce Disclosure Initiative. We’ll be following up with more organisations next year.

We believe in female board representation

Greater gender diversity also improves decision-making and brings a wider range of skills, perspective and experience to the table, which helps ensure companies are competitive.

As a member of the 30% Club Investor Group, we call on FTSE 100 compnies to have at least 30 per cent women at senior management level.

What we didIn 2019 we voted against management at Centrica, highlighting our concerns around their low female board representation. This energy company owns names you may be familiar with, such as British Gas, Centrica Hive, Direct Energy and more.

What happenedWe were delighted that their new Chairman responded to our letter. We met Centrica’s senior management in September to discuss their progress in improving diversity, proving that your voice counts – especially when it speaks with over 8 million other Nest members.

Living in a digital worldAround the world, companies like Facebook, Toyota, T-Mobile and even organisations like the Labour Party and the Ecuadorian and Russian governments saw serious security breaches in data over 2019. More than half of UK businesses reported a cyber-attack. Experts tell us that it’s not a case of if a business will be hacked, but when.

Cyber-attacks could lead to a serious hit on an organisation’s bottom line, which in turn means any investment made in them wouldn’t pay off. We’re using our influence to make sure companies take this threat seriously.

Boosting cyber securityNest teamed up with Railpen, another pension provider, to conduct an in-depth study with a range of industry experts. Our aim was to understand how companies are protecting themselves against cyber threats.

We released a report for the wider pension industry, offering guidance on how they can assess cyber security risk and preparation in the companies they plan to invest in. Following this, we’re helping the National Cyber Security Centre develop a cyber security awareness index which will be freely available and widely published.

The index will bring much needed transparency on how UK companies are protecting themselves against attacks. We hope it will persuade company boards to increase their cyber security – not only to protect their own profits but to protect the digital information and security of their customers, many of whom may be Nest members.

Tackling the climate crisis remains a major priority. We’ll explore more ways we can support green technology and encourage positive change from companies that contribute towards global warming.

Looking ahead in 2020: food for thought

Food security

Single-use plastic

Sugar taxFood waste

Deforestation to clear land

for palm oil production The use

of strong antibiotics, pesticides

and fertiliser

Obesity

Animal welfare

We’ll also be looking at the food industry. It’s traditionally been a steady investment that delivered solid returns and access to growing markets. However, agriculture, livestock, food transportation and manufacturing have a significant impact on climate change. The industry is also vulnerable to changes in consumer taste, the obesity epidemic, health regulations like the sugar tax, and a range of social and environmental challenges.

In recent years, mainstream media has highlighted several ecological, health and social problems that the industry still needs to address. But all around the world, consumers are increasingly aware of trends in healthy, sustainable eating and are demanding increased transparency over ingredients, provenance, supply chains and ethical considerations. More importantly, they’re prepared to vote with their feet – or in this case, their mouths.

Over 2020 we’ll investigate how food manufacturers and retailers are navigating these challenges and adjusting their business strategies to remain sustainable in the long term. We plan to engage with a range of companies in the industry to conduct an in-depth study, looking to see how they’ll tackle ESG risks and challenges.

We are what we eat: rising concerns in the food industry

We think investing responsibly is better for your pocket. But we were delighted to find out that so many of you care about the impact your pension savings have on people and the planet too.

Regular Nest surveys tell us that 73% of you agree that it’s the right thing to do with your money. Two thirds of you wanted to know more about our status as a responsible investor. You can get the in-depth details of our responsible investment strategy on our website.

For a quick overview, watch our video on growing your money with responsible investment.

See if your pension is on track. Log in to your Nest account today.

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—© Nest Corporation 2020. All rights reserved. This information does

not constitute financial, investment or professional advice and should not be relied on. Any form of reproduction of all or any part of this material is not allowed. We do not give any undertaking or make any representation or warranty that this material is complete or error free. We do not accept responsibility for any loss caused as a result of any error, inaccuracy or incompleteness. The Nest trade marks and trade names used above are owned by Nest Corporation and should not be used in any way without our permission.

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