Agenda item

Victoria Moffett (Lead Commissioner – Pensions and Investment) introduced the report which provided updated governance information relating to Warwickshire Pension Fund’s forward plan, risk monitoring, training, and policy. She highlighted the changes that had been made to the Risk Monitoring Chart, including an increased climate change risk. This had been upgraded following discussion at the previous meeting of the Sub-Committee, and in recognition that climate change was moving at an accelerated pace.

In respect of climate change risk, Councillor Millar queried the statement that “the Fund on its own can have limited impact on what happens globally.” She emphasised the symbolic value of divestment, which had been a subject of many letters and emails from members of the public.

Victoria Moffett advised that the highest category of risk had been allocated to climate change. It would not be possible to upgrade the risk status; however, the wording could be amended to reflect this point.

Councillor Gifford stated that he had also received a high number of letters and emails calling for divestment from carbon-intense companies. He emphasised that this was a reasonable request; however, it was debatable whether divestment would lead to a better outcome than engagement with investment managers. By engaging, the Pension Fund was able to exert influence. If a company failed to engage or meet agreed targets, the Fund could withdraw its investment.

The Chair stated that he had received a high amount of correspondence relating to divestment. He would draft a statement in response emphasising the advantages of engagement and share this document with members of the Sub-Committee. He highlighted that relatively few companies were responsible for the highest proportion of emissions globally. However, a much larger number of companies made use of their services.

Councillor Gifford highlighted the importance of seeking a commitment from companies to achieve net zero carbon. This was not restricted to big fossil fuel companies, but any company that used fossil fuels to some extent. He suggested that the Chair’s statement include reference to the Fund’s commitment to investing in renewable energy.

Councillor Millar emphasised the actions that the Pension Fund could take to hasten the end of the fossil fuel era. As an activist shareholder, the Pension Fund could seek to mitigate the harm caused by climate change. She emphasised that for many people, the effects of climate change would result in uncomfortable conditions for retirement.

In response to the Chair, Andy Felton (Assistant Director, Finance) advised that the proposed Responsible Investment Policy reflected the principle that divestment was not purposeful if there was scope to exert influence to reduce carbon impacts. To do so, it would be necessary to secure a measurable commitment for carbon reduction. He advised that there were other investors willing to step in if the Pension Fund chose to divest and these investors would not seek to challenge companies on their environmental practices.

Councillor Millar emphasised the importance of maintaining a strong focus on engagement with investment managers to ensure that the Responsible Investment Policy was kept under review as an iterative process.

Philip Pearson (Hymans Robertson) provided an overview of the proposed amendments to the Responsible Investment Policy. These included updated Investment Beliefs, a more robust Stewardship of Assets Policy, and an emphasis on effective engagement. It was considered that engagement was most effective when focused on a limited number of priorities.

Philip Pearson advised that two options were available to the Sub-Committee – to adopt the Responsible Investment (RI) priorities of Border to Coast Pensions Partnership (BCPP) to ensure closer alignment, or for the Fund to agree its own RI priorities and seek to implement them as far as practicable. He advised that Hymans’ recommendation was to adopt the priorities set out by BCPP which included decarbonisation.

Councillor Gifford suggested that the Fund adopt BCPP’s RI priorities. He accepted that there were advantages to the Fund setting out its own priorities. However, this could limit the effectiveness of engagement.

Councillor Millar agreed that adopting the RI priorities of BCPP made good sense. However, she asked if the Fund, as a shareholder of BCPP, would be able to influence development of these priorities on an on-going basis.

The Chair highlighted BCPP’s priority to achieve “low carbon transition”. He suggested that this be reworded to “a transition to low carbon”. He expressed support for the adoption of BCPP’s RI priorities.

In response to the Chair, Milo Kerr (BCPP) advised that other pension funds had opted to adopt BCPP’s RI priorities. He stated that BCPP would welcome the Sub-Committee’s input on on-going development of priorities. In respect of the suggested rewording of “low carbon transition”, he stated that, provided there was alignment in sentiment and meaning, inconsistency in the wording would not present a problem.

Bob Swarup (Independent Advisor to the Sub-Committee) suggested that ‘Continuous Improvement’ be included as a policy objective. This would give a clear message that the Fund’s commitment to carbon reduction was a long-term, evolutionary process. This suggestion was supported by members.

The Chair suggested that ‘Opportunities for Energy Reduction’ also be included as a policy objective.

Andy Felton advised that it would be possible to include ‘Continuous Improvement’ and ‘Opportunities for Energy Reduction’ as policy objectives within the Responsible Investment Policy.

The Chair highlighted the statement that “divestment or exclusion may be appropriate where… the Committee expects all divestments or exclusions to be justified on financial grounds.” This could lead to a conflict in circumstances when an opportunity arose to invest in a concern which had a poor Environmental, Social, and Governance (ESG) record but presented exceptionally good financial benefits.

Philip Pearson advised that, in practice, this was unlikely to present a problem. Financial return must be the overriding consideration; however, it would be possible to invest in a company which had a superior ESG record, provided the investment return was comparable. In respect of investment in fossil fuels, a long-term view would be taken, recognising that the timeline for production of fossil fuels was limited.

Councillor Millar stated that clarification of this point was required. For example, the Fund had resolved to take a moral stance to divest from Russian-related assets. Similarly, it would not invest in company that profited from child labour irrespective of the investment return.

Philip Pearson advised that it would be possible to amend the wording of the Responsible Investment Policy to reflect these concerns, making it clear that the Fund was mindful of its investment responsibilities.

In summary, the Chair stated that the Sub-Committee was content to adopt the RI priorities of BCPP subject to the amendments specified. Redrafting of the Responsible Investment Policy would be undertaken by Hymans.

Members agreed to delegate responsibility for approval of the revised Responsible Investment Policy to the Chair.

Resolved:

That the Pension Fund Investment Sub-Committee:

     1.          Notes the items contained within the Governance Paper, including how training and development for members can be made more accessible.

     2.          Authorises the Chair to approve the proposed changes to the Responsible Investment Policy.