Agenda item

To consider a report from the Director of Corporate Operations seeking approval for proposed amendments to the Pension Fund’s Responsible Investment Policy for consultation with scheme members and employers, as recommended by the Responsible Investment Sub-Committee.

The Panel and Board considered the report from the Director of Corporate Operations (Item 10 in the Minute Book) introducing proposed amendments to the Pension Fund’s Responsible Investment (RI) policy. The Director presented a draft of the RI policy including updates based on feedback received from the RI consultants Minerva and key areas that have been brought out in Members’ discussions and representations from scheme members. The most significant additions to the policy are:

·         that the Pension Fund supports the objectives of the Paris Agreement, and believes that keeping a global temperature rise this century to well below 2?C relative to pre-industrial levels is entirely consistent with securing strong financial returns;

·         to address Climate Change there needs to be a transition to a low carbon economy, but that must be an orderly transition that is inclusive and does not leave anyone behind – this is referred to as a Just Transition; and

·         that the Pension Fund commits to the aim for its investments to have net-zero greenhouse gas emissions by 2050.

The Director reminded the committee it had been reported by Friends of the Earth that the Pension Fund had £136m of investments in fossil fuel companies. This figure was based on the Carbon Underground 200 index, which only includes companies owning reserves of fossil fuels, and not in wider supply chain for example in processing or selling fossil fuels. With the assistance of its investment managers the Pension Fund has reviewed its exposure to fossil fuels and renewable energy based on a fuller definition. As at 31 December 2021 the Pension Fund was valued at £9.9bn; £323m (3.3%) was invested in renewable energy and £214m (2.2%) was invested in fossil fuel companies.

The Director shared a draft of the Fund’s third annual RI update for scheme members, prepared on the basis of the proposed changes to the RI policy. The RI update contains an explanation of why the Pension Fund continues to not believe in disinvesting from fossil fuel companies which is also listed as follows. It is hoped this will improve dialogue with scheme members.

·         Transitioning to a lower carbon economy needs to be managed carefully to ensure that it is a Just Transition - that the benefits of a low carbon economy transition are shared widely.

·         Some fossil fuel companies are playing an important role in the transition to a lower carbon economy and these companies need support from investors.

·         If the Pension Fund sells its shares in fossil fuel companies, it will lose its ability to engage with those companies. The investors that would buy these shares may not choose to engage with these companies.

The Director presented figures showing the Pension Fund’s very small investments in thermal coal. Thermal coal is the greatest challenge for the Fund’s RI policy and the proposed aim for net-zero by 2050 due to the very high carbon emissions and lack of possible transition to lower carbon alternatives, therefore in spite of the very low current investment in thermal coal, following the agreement of the RI sub-committee it was recommended that the Fund works to remove this exposure from the Fund’s portfolios and this is included in the RI policy.

It is 3 years since the Pension Fund consulted on its RI policy and so given the changes proposed the Director recommended that the Pension Fund consults with its stakeholders on what they consider should be the Fund’s priorities when considering RI. It is proposed that the consultation would run from 4 April to 31 May 2022 and the results will be reported to the Pension Fund Panel and Board on 28 July 2022 with a recommendation on finalising the policy at that point.

RESOLVED:

a)    The proposed updates to the Responsible Investment policy were agreed for consultation with scheme members and employers.

b)    That the annual Responsible Investment update is published.

c)    That a further tranche of work from the Responsible Investment consultants, MJ Hudson (formerly MJ Hudson Spring), is commissioned to again review the Pension Fund’s investment portfolios and produce a plan for meeting the 2050 net-zero aim.