Agenda item

67.1     The Committee considered a presentation from Principles for Responsible Investment (PRI) on its goals  to understand the investment implications of environmental, social and governance (ESG) issues and to support signatories in integrating these issues into investment and ownership decisions. The East Sussex Pension Fund (ESPF or the Fund) recently became a signatory of the PRI.

67.2       The Committee’s discussion included the following key issues:

•           While it was made very clear that the PRI could not give investment advice and that they cannot take a position on the merits of investment vs divestment, it was noted that from the perspective of effecting change in company behaviour, unilateral divestment achieved little.

•         The Fund is being lobbied to divest from companies that operate in areas where human rights violations occur, particularly the Occupied Territories in Israel. The Fund has exposure to 4 of the 112 companies on the UN Human Rights  listed companies within its passive equity mandate – two travel companies, a milling company and Motorola – and three of these four through its Smart Beta passive manager, Storebrand (excluding Motorola). None have their principal operations in the Occupied Territories.  This list is not produced by PRI (which is endorsed by the UN) and it would not be possible for PRI to produce a similar global list of all the companies that its signatories hold stocks in that may have involvement in areas where human rights abuses occur, due to the complexity of the task. PRI will be doing more work in relation to human rights, however, in the future.

•         It was acknowledged that there are physical limitations to engagement or divestment imposed on indirect asset owners whose market exposure is achieved through collective actively managed or passive index vehicles. Passive equity managers exercise relatively little influence over the companies they hold shares in, as they invest in a broad list of companies tracking the stock market. Storebrand, the funds new passive-like manager however, undertakes a vetting process before purchasing each stock that involves engagement over their ESG position and the fund do not invest in companies that do not meet its standard. Three of the four companies in the UN list currently meet the standards Storebrand sets.

•         The PRI representative underlined the criticality of ensuring that many companies and sectors make the energy transition, adding that this requires investors to remain heavily involved and engaged. It was also acknowledged that the different levels of challenge to companies and sectors required government policy to assist in making the economics of the transition work for them. It was discussed that the direction of travel of any company is perhaps more critical than its current absolute alignment with a particular global warming scenario at this stage. Some industries, such as steel, will find it harder than others to transition away from carbon. PRI takes the view that fund managers should pay close attention to which companies are moving towards decarbonisation, even if they have not achieved it in the short term, as there are likely to be winners and losers in the transition to a low carbon economy. 

•         The argument against divesting from fossil fuel companies has historically been that they provide dividend payments to the Fund, which helps ensure the Fund achieves its fiduciary duty to provide a pension to its members. The economy appears, over the last year in particular, to be beginning to move away from fossil fuel companies and in favour of tech companies. This makes aligning a fund’s investments around ESG matters less of a risk than it was 10 years ago and also means the need to encourage fossil fuel dependent companies that the Fund invests in (via fund managers) to reduce emissions begins to become part of the Fund’s fiduciary duty, as those companies that fail to adapt to a low carbon economy could cease to exist. There is evidence that this is happening, for example, the PRI representative cited Shell Oil – which is making significant progress but is not yet aligned with 2° - as a good example of such company engagement with the energy transition, and where leaders in the industry may be considered by asset owners and investment managers as opportunities, because Shell has committed to being carbon neutral by 2040 as a result of shareholder pressure (it was clarified after the meeting that the date was 2050 and that it was not binding).

•         It was suggested that effective company engagement strategies might involve a set of escalating steps. A number of possible different investor engagement approaches were discussed in this context. It was confirmed that the engagement approach taken by The Institutional Investors’ Group on Climate Change (IIGCC), with whom the PRI work closely, which employs an escalating company engagement strategy, and of which ESPF is a member, is completely aligned with and to some extent more aggressive than that advocated by the PRI currently. This is because PRI operates globally and IIGCC is European focused, where action on climate change is more advanced. The two are otherwise completely aligned, for example, on the goal of limiting climate change to 1.5C.

•         The PRI discussed a number of signatory member approaches including active engagement incorporating escalation which involved asset managers( as shareholders of the company) voting against a company’s accounts or board of directors where they are not taking sufficient action on carbon emissions and with, in some cases, divestment as the final step. For passive mandates this is difficult as divestment from individual companies and or sectors is not possible, however, passive managers can still vote against a company’s accounts or board of directors each year. Over time, this should still send a strong message as it gathers momentum and more investors sign up to PRI.

•         Local Government Pension Scheme (LGPS) are expected to retain exposure to passive mandates, but there is increasingly limited appetite for generic index funds. The Fund has moved a large amount of its assets from generic index funds into a Smart Beta fund that take into account ESG matters in their index of stocks, although this comes with an additional cost. It is expected that new products are likely to emerge that are more competitively priced that still provide reduced carbon exposure as ESG tilted index funds begin to provide the same returns or outperform generic index funds. It was observed that increasing value is seen in Impact investment approaches as opportunities for investors. This is an approach that the Fund has embraced and in which it has invested 25% of its equity portfolio.

67.3       The Committee RESOLVED to note the presentation.