The Universities Superannuation Scheme (USS) has introduced a ‘climate tilt’ to a portion of the equities held by the scheme, in a move that is expected to shift around £5bn into a climate transition index.

The tilt will affect a portion of the Global Developed Markets Equity component of the defined benefit (DB) and defined contribution (DC) funds held by the scheme.

It has been highlighted as a “first important step” in the USS’s broader journey to achieve net-zero, with the move expected to initially reduce emissions by at least 30 per cent compared to the broader equity market.

As well as the initial fall in emissions, the strategy will aim to ensure that portfolio carbon emissions fall by 7 per cent every year thereafter, including all scope 1, 2 and 3 emissions.

The investment will be managed by Legal & General Investment Management, adopting the Solactive USS Developed Markets Climate Transition Benchmark, which was developed in conjunction by USS and Solactive, a global index provider.

This approach will seek to reward companies who can demonstrate they are on the path to lowering greenhouse gas emissions by giving them a higher weighting, and will avoid investing in companies that could fall foul of the UN Global Compact.

As well as barring companies that rank poorly on the four UN Sustainable Development Goals (SDGs) relating to environmental sustainability and climate impact, the index is required to be overweight in companies that are successfully hitting adequate decarbonisation targets and must also not be underweight in ‘high-impact sectors’. These are sectors that are deemed critical to the successful transition to a low-carbon economy, such as manufacturing and construction.

Commenting on the update, USS Investment Management CEO, Simon Pilcher, commented: “Today’s news is a natural progression to our investment strategy following our announced ambition to be net-zero for greenhouse gases by 2050 if not before. We think we will be one of the first major UK pension schemes to do this and is a significant step towards achieving our net-zero ambition.

"The move will also inform our thinking on the way we approach investment more widely in both the DB and DC segments of the scheme.”

USS Investment Management, head of strategic equities, Innes McKeand, added: “Our work with LGIM and Solactive in global equities is an exciting first step on our journey to net-zero, and we look forward to making further significant progress in the coming year.

“We believe investment in more climate-friendly assets - those positioned to adapt or benefit as the world transitions to a low-carbon economy - offer upside return potential, while lower exposure to companies poorly positioned to adapt to such a world reduces our exposure to downside risk."

Further announcements on interim targets are also expected from the scheme “later this year”.

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