Equity Evolution. Our plans for Cushon Global Equity

In 2025, Cushon Master Trust is planning to redesign its bespoke low-carbon index, Cushon Global Equity, which was launched in 2022 and is used in all of our default investment strategies. This index was initially constructed to achieve a 60% reduction in Scope 1 and 2 emissions compared to its benchmark (Solactive GBS Global Markets Large and Mid-Cap index), with a further target of reducing emissions by 7% annually. The index also has a rigorous United Nations Sustainable Development Goals (UN SDGs) screen, where companies are scored on their alignment to the 17 goals. If a company’s score does not meet the required threshold, they are excluded (leading to c25% of entities excluded from the largest ~3,000 global companies).

Emission reductions to date

In 2023, Cushon Global Equity achieved a 36% reduction in emissions via further tilts towards green revenue companies—well beyond the annual target of 7%. This positive trend continued in 2024, with the index achieving a further 35% reduction from the 2023 total (See Appendix 2 for an emissions breakdown). Despite the much-reduced emission intensity, Cushon Global Equity tracks global equities performance with low tracking error, displaying the art of the possible of delivering strong returns for our members whilst also minimising the financed emissions of the portfolio (see Appendix 3 for Cushon Global Equity vs FTSE All World comparison).

Given that the majority of Cushon Master Trust assets are allocated to Cushon Global Equity (£1.5+ Billion), the strong emissions reduction of the index is a major driver towards Cushon MT’s 2030 Decarbonisation target, which aims for an 80% reduction in Scope 1 and 2 emissions compared to the 2022 benchmark. Notably, as of September 2023, Cushon Master Trust has already achieved a 78% Scope 1 and 2 emission reduction

Recognising the importance of transition risks

However, Cushon Master Trust recognises that a low-carbon portfolio does not eliminate the transition risks associated with climate change. Companies with a lower carbon footprint may, in theory, be better positioned to cope with higher emissions taxes or similar regulatory changes. But a range of other factors, including diverse emissions trading schemes across different regions, public sentiment, and contribution to climate solutions could have a considerable impact on how companies are affected by transition risks.

With this in mind, Cushon Master Trust is working with Transition Exeter (Trex), a spin-out from the University of Exeter, to better understand the climate risks associated with the Cushon Global Equity index. The outputs will shape future tilts and exclusions in the 2025 redesign, with the aim to reduce Cushon Global Equity’s exposure to climate risks without compromising diversification, and the ultimate goal of building resilience to our member’s portfolios to different climate scenarios (see Cushon MT’s Climate Considerations.)

Considerations into 2025

There are multiple important considerations for the 2025 index redesign, with the first being the potential exclusion of coal. Thermal coal notably has the worst environmental impact, due to its use in energy production. These companies are typically not aligned to the UN SDGs, so the Cushon Global Equity index currently has zero exposure to thermal coal.

On the other hand, metallurgical coal, which is essential for steel production, has a comparatively lower environmental impact and will likely continue to play a role in a transitioned world due to the current lack of viable alternatives in steelmaking. Electric Arc Furnace (EAF) steel production is currently the most viable alternative to the traditional process, which emits significantly less CO₂ because it primarily uses recycled steel. EAF’s account for 28% of steel production in 2024, with this expected to rise to 41% by 2030 [¹]. Cushon MT is actively evaluating the potential exclusion of metallurgical coal as well, in recognition of the growing feasibility in steelmaking alternatives.

The next consideration is whether to exclude Oil and Gas (O&G) exposure from Cushon Global Equity. The index is already 90% underweight in this sector as a result of the rigorous UN SDG screen. Natural gas is widely regarded as a transition fuel because it produces significantly lower carbon emissions compared to oil and thermal coal, making it a critical component in the shift to cleaner energy. Given its role in reducing immediate emissions while renewable energy infrastructure continues to scale, removing gas-focused companies entirely may inadvertently hinder progress toward decarbonisation. Additionally, excluding oil and gas companies presents significant challenges due to the complexity of differentiating between their activities. Many of these companies are involved in both O&G production, making it difficult to separate the two commodities.

From an investment perspective, O&G is historically a strong inflation hedge. Essentially, in periods of high inflation, O&G assets perform particularly well. Since Cushon MT’s long term return target is CPI + 3.5% per annum, inflation protection is an important consideration. Another element worth noting is the potential tracking error issue from removing the residual O&G from Cushon Global Equity. Given that the index currently tracks global equities performance closely despite being 90% underweight in O&G, the removal of the remaining 10% would likely have minimal impact on tracking error.

Cushon Master Trust will actively explore whether it is feasible to exclude the residual oil from our portfolio, in a way consistent with our fiduciary duties and that does not fully remove exposure to gas.

In summary

As Cushon Master Trust moves forward with the 2025 redesign of its low-carbon index, there are many considerations to be made that will shape the future of the index. From further exclusions in coal, oil, and gas to a deeper understanding of climate risk exposure, each adjustment will play a key role in seeking continued emissions reductions without sacrificing diversification or returns. As we evaluate these factors, our commitment to ensuring strong financial outcomes for our members whilst tackling climate change remains unwavering. Watch this space as we continue to lead the way in portfolio decarbonisation and resilience, ensuring that our portfolio is prepared for a rapidly changing world.

Appendix 1

Cushon Master Trust is regulated by the Pensions Regulator with PSR number 120008536. Cushon MT Limited is the sponsoring company of Cushon Master Trust and is registered in England and Wales with company number 12366412, .

This is intended for professional advisers. Its purpose is to provide an overview of certain matters and it is not a comprehensive description of the Master Trust’s approach and policies relating to sustainability and the related risk and issues that may arise.

The default strategy of the Cushon Master Trust is the Cushon Sustainable Investment Strategy. This invests in funds managed by third parties which raises the following particular risks in regard to our decarbonisation targets:

• The availability of fund-level ESG related data relies on fund managers disclosing their fund holdings to data providers. This data might lag, causing our ESG reporting to reflect data that is potentially no longer accurate (for example, the carbon intensity of a portfolio might have changed due to a change in underlying fund holdings that is not yet reflected in the data used by third-party data providers).

• We rely on third-party fund managers to accurately disclose their holdings, and on data providers to accurately aggregate equity and fixed income data up to the fund level. Any errors in this can impact Cushon Master Trust’s own reporting to clients.

• Where third-party managers do not achieve their stated sustainability targets this could also affect achievement of our targets.

We also recognise that our portfolio emissions are unlikely to monotonically decrease, and any targets or predictions for our portfolio are not guaranteed in any way. There are many significant uncertainties that could cause actual results and outcomes to differ materially from any desired forward-looking outcomes

Appendix 2

Cushon Global Equity index emissions as at 30th September 2024, broken down by sector:

Equity coverage: Scope 1&2 = 92%, Scope 3 = 89%

Cushon MT recognises the importance of decarbonising across all sectors, as each will play a role in the transition towards a Net Zero world, and to ensure the portfolio remains well diversified. Given Cushon Global Equity’s 7% per annum Scope 1 & 2 emissions reduction target, we expect all sectors to be contributing towards this. See below for the evolution of Cushon Global Equity’s emissions, by sector:

Note: Cushon MT uses NatWest Group resources to calculate emission intensity. The methodology changed in 2024 which can explain any outlier figures displayed in the “2024 Change” column. Predicted emissions reflect a 7% reduction per annum, starting from the actual values in 2024

Forest destruction and poor agricultural practices cause 30% of global greenhouse gas emissions[²]. Due to the significant emissions generated by Agriculture, Forestry, and Other Land Use (AFOLU), we have identified and highlighted our exposure to this sector and its associated greenhouse gas emissions.

Given the inherently high emissions produced from the AFOLU sector, Cushon MT also feel it is essential to be decarbonising our portfolio in this area too. This effort ensures that we continue to support companies that generate greener revenue streams while excluding the worst environmental offenders. Aligned with Cushon Global Equity’s goal of a 7% annual reduction in Scope 1 & 2 emissions, we expect the AFOLU exposure to contribute to this target. See below for the evolution of Cushon Global Equity’s AFOLU emissions:

Note: Predicted emissions reflect a 7% reduction per annum, starting from the actual values in 2024

Appendix 3

[¹] Blast Furnace to EAF Transition: Navigating Challenges and Market Gaps - Steel Hub

[²] Area of Focus: Agriculture, Forestry, and Other Land Use (AFOLU) - Verra

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