Agenda item

Philip Pearson (Hymans Robertson) presented the report which provided details of the Fund’s carbon exposure and sought approval for the adoption of a set of metrics against which carbon exposure could be measured and tracked.

In response to Councillor Millar, Philip Pearson advised that, in many circumstances, engagement with investment managers was a more effective means of lowering carbon emissions than divestment. By requesting details of a company’s plans to reduce carbon, and holding it accountable for delivery of the plan, long-term asset owners could act positively to lower emissions. If a company failed to engage or meet its targets, the Pension Fund could choose to withdraw its investment.

Councillor Millar underlined the importance of a defined timescale for this process. For example, a carbon-intense company could prevaricate and delay implementation of a carbon reduction plan. She asked if a definitive cut-off date would be mandated.

Philip Pearson advised that failure to deliver a carbon reduction plan would be an adequate reason for divestment. He stated that a plan should have tangible milestones to enable monitoring of its implementation. As soon as a commitment was not met, the manager or asset owner should divest. In practice, this could be challenging as it required considerable effort by investment managers to monitor the progress made by companies against carbon reduction plans.

Councillor Gifford expressed support for engagement with the backstop of divestment. He highlighted the importance of ensuring that investment managers act promptly to prevent ‘green washing’ by companies not fully committed to achieving their targets.

Bob Swarup (Independent Advisor to the Sub-Committee) highlighted the benefits of establishing a clearly defined governance framework for climate change which identified approaches to monitoring and oversight as well as risks and opportunities. He highlighted the areas of hidden risk, such as investment in infrastructure where there was an increased risk of flooding.

Anthony Fletcher (Independent Advisor to the Sub-Committee) stated that active investment managers were engaging with companies on behalf of the Pension Fund. However, there was a need to focus on passive investments which could otherwise be overlooked.

In response to Councillor Millar, Rachel Elwell (Chief Executive, Border to Coast Pensions Partnership) advised that Border to Coast Pensions Partnership (BCPP) had made a commitment to reach net zero by 2050. The Company was also a member of Climate Action 100+. She stated that BCPP was developing a roadmap to net zero carbon. Governance would be determined by a joint committee which would develop metrics to track carbon. A workshop would be held in July 2022 to set targets. Approval of the roadmap would be sought from the Company’s Board, prior its publication in October 2022.

Chris Hitchen (Chairman, BCPP) emphasised that effective governance was key to lowering emissions. He expressed support for engagement, stating that BCPP would engage with companies with the option of divestment if no progress was made.

Councillor Hammersley queried whether prioritisation of climate change considerations could present a barrier to the Fund’s principal responsibility, to act in the best financial interest of its members.

Councillor Gifford commented that the Fund was a long-term investor. He emphasised the importance of considering the long-term effects of climate change and its impact on investments. The Fund would be exposed to risk if it chose to ignore climate change. He stated that it was prudent to develop an understanding of investment risks and opportunities presented by climate change.

Councillor Millar stated that it was possible to act in the best interests of members of the Pension Fund and invest responsibly to reduce emissions. She emphasised that for many people, the effects of climate change would result in uncomfortable conditions for retirement.

In response to the Chair, Philip Pearson advised that climate change risk could be separated into three areas: physical risk, such as flooding or heatwaves; transition risk, where a carbon-intense company continues to operate until it is eventually shut down by government; and litigation risk, where a company is considered by courts to have acted irresponsibly. The most significant of these was transition risk; enacting measures to reduce carbon was compatible with the Pension Fund’s fiduciary obligation.

In response to the Chair, Philip Pearson advised that, if the Fund decided to divest from all companies that did not meet the criteria for residual carbon emissions, a share of approximately 35% of the UK market would be available for investment. This would increase the volatility of investment returns, potentially to the extent that these stocks would be of interest to multiple investors at an increased cost.

The Chair stated that a potential loss of 65% of the UK market demonstrated the importance of engaging with companies to reduce carbon impacts.

In response to the Chair, members indicated support for the recommendations of the report.

Resolved:

That the Pension Fund Investment Sub-Committee (PFISC):

     1.          Approves the adoption of the metrics at paragraph 1.3; and

     2.          Requests that an annual report be brought to the PFISC setting out progress towards the metrics chosen.