Agenda item

6.1          The Committee considered a report providing an update on the investment
activities undertaken by the East Sussex Pension Fund.

6.2          The Committee considered a number of arguments for and against the sale of equities held in fossil fuel companies.

• The share value of oil companies such as BP, Shell and Exxon had declined by at least half in the past few months, although they were now recovering. This could demonstrate that they are becoming volatile investments when they had historically been safe investments. As their share prices recover, therefore, investment managers could be advised to sell them to protect against future price falls.
• On the other hand, the decline in value of BP’s shares could be explained by its decision to commit to 50-100% carbon reduction over 20 years, meaning the devaluing of its stock price is due to the market’s recognition of the capital costs BP will incur fulfilling this commitment.
• Keeping an eye on the value of fossil fuel investments is undoubtedly important. However, stability of the Fund is also important given the current economic climate and the recovery of equities as an asset class in recent weeks. Furthermore, the Fund needs to ensure it has sufficient cash flow during the economic downturn to pay pensioners and oil and gas companies have traditionally been a good source of cash for the Fund through their dividends.
• The decision to disinvest in the short term is not consistent with the Fund’s stated Investment Beliefs that include that long term investing provides opportunities for enhancing returns; and that influencing companies as a shareholder is more effective way of changing behaviour of companies, for example, shareholder pressure, including by Ruffer, one of ESPF’s investment managers, on BP has had a major effect on BP’s decision to aim to decarbonise.
• The work undertaken by the Environmental, Social and Governance (ESG) consultant, PIRC, appointed following the notice of motion by Full Council, is complete. It has published a number of recommendations for how the East Sussex Pension Fund (ESPF or the Fund) might further integrate ESG considerations, including those relating to its approach to fossil fuel exposure, into its investment strategy. The ESG working group has also undertaken a lot of work in recent months, including around the Fund’s asset allocation. The next steps include, subject to agreement by the Committee, to develop the Fund’s investment beliefs to better set out how it may become a more proactive responsible investor; respond to PIRC’s recommendations; and to adjust the Fund’s asset allocation, which are currently overweight in passive equities and so more exposed to fossil fuels than they could be.
• The exposure to fossil fuels is likely to decline as strategic asset allocation is reviewed and the allocation of the Fund’s value in passive index equity funds or holdingsis reduced in favour of either more active managers, or smart beta funds that are weighted against carbon intensive companies. Fossil fuel exposure is likely to halve from 4% to 2% once the asset allocation is complete, as it will favour investment in companies that are more carbon efficient or proactive in reducing their carbon footprint.
• Fossil fuel exposure is largely through passive equities which are invested in with UBS who were appointed as the ACCESS passive manager after a joint procurement. Instructing disinvestment from fossil fuels to mangers would be complicated by the fact that the Fund has pooled its investments. The Committee can only advise the ACCESS operator, Link, on investment decisions and not instruct them to sell.
• The value of the carbon footprint tracker completed by Eiris is to enable the Fund to set targets for reducing its carbon footprint by identifying those companies that need to be targeted for engagement, either as they are high emitters or have a weak energy transition score. Some of the companies with poorer transition scores will be ones without significant stakeholder pressure, as they are not currently high emitters of carbon relative to others.

6.3          The following amendment to the recommendation was moved by Councillor Tutt and seconded:

1) note the Action Log and Investment Workplan (appendix 1)

2) note the Quarterly Investment Report from the Investment Advisor, Hymans Robertson (Appendix 2);

3) note the carbon footprint report by Vigeo Eiris (appendix 3)

4) to agree to instruct fund managers to sell fossil fuel investments as they begin to recover in value.

The amendment was put to the vote and LOST by three votes to two.

6.4          The Committee RESOLVED to:

1) note the Action Log and Investment Workplan (appendix 1)

2) note the Quarterly Investment Report from the Investment Advisor, Hymans Robertson (Appendix 2);

3) note the carbon footprint report by Vigeo Eiris (appendix 3)