Agenda item

27.1     The Committee considered a report introduced by Sian Kunert and Andrew Singh who drew the Committees attention to the following points:

 

1)    Lots of work has been undertaken on the efficacy of divestment and engagement and associated financial and legal considerations and a detailed report has been produced as requested.

2)    The Carbon footprint report will come to the next meeting as a new service provider has been sourced. The report will look different to previous provider and there will be data continuity issues as data has been brought in line with anticipated national LGPS guidance.  It was noted that data will evolve each year.

3)    Officers noted that there has been negative press around the climate scenario modelling. This will have to be done however officers do not want to commission a report which does not meet the needs of the Committee or support the strategy and would like to get a better sense of how to approach this and make best use of the data. Work is being undertaken by the LGA and scheme advisory board who will publish a response to the government consultation.

4)    The Stewardship report is submitted annually and takes time to compile so can feel out of date once published. The Impact Assessment is one of the criteria of good stewardship and feeds into that.

 

Performance report:

5)    The Committee received an overview of the quarter which is considered to have been largely positive. Opinion is that inflation has peaked and is reducing and should stabilise in time. The market is trying to predict interest rates, when this is more widely understood things will settle. Unemployment data was slightly weaker and wage inflation was also a factor.

6)    The Committee considered the performance of the different fund managers and noted there were various contributing factors. Performance is similar to the last quarter. Newton and Ruffer had a weak quarter as they are both positioned for a more muted market. WHEB and Wellington do not hold tech stocks which performed well this quarter. Both WHEB and Wellington are approaching the 3 year point with the Fund.

7)    The Wellington investment has recently been rated amber which is to monitor. The advisers do not suggest any action to be taken, but they will monitor the strategy for the next 12 months. The lead portfolio manager has stepped back  to manage another mandate, there has been an experienced member of the portfolio team promoted to lead portfolio manager with ultimate control on decision making, it is not anticipated that the portfolio will change with the new manager but it’s prudent to monitor the situation. , The Committee will consider an update at the next meeting. There is scheduled training due to take place in the coming month which will provide an opportunity for dialogue with them.

8)    Ruffer have underperformed in the last quarter however the Committee noted its positive long-term performance. There have been some personnel changes at the company. Positioned for a more muted market outlook. There were a narrow set of stocks that drove the value in this quarter and Government bonds and equities did not perform well.

9)    Newton have under-performed and the environment has been volatile, not yet at point of looking to review the mandate, close monitoring though in the meantime. UBS infrastructure has also performed badly.

10) Harbour Vest and Adams Street, both private equity managers, 1 year numbers are quite negative but over 3 to 5 years are significantly positive. The valuation of their assets is different to more liquid assets. They tend to lag public market valuations and there are fewer transactions taking place for valuation purposes. 

11) ISIO undertook some exploration with managers, for the July strategy day, to see how realistic the valuations were. If a valuation is above 25% they would be concerned but current valuations are all in comfort range.

12) The Committee discussed concerns that the Fund has become more volatile recently agreed and that it would be beneficial to see assessment of the Fund across different trading periods to identify what the increased volatility may have arisen from.

13) ACCESS have reviewed and communicated views to officers regarding whether to convert to the sustainable version of the M&G fund, more information will be shared with Committee when available.

14) Baillie Gifford have received some negative press however the sub-fund ESPF invests in is Paris aligned which is fossil fuel free. 

 

 

27.2     The Committee considered the Strategy review and noted the following points:

 

15) The Strategy was discussed at the July workshop and a relatively minor adjustment to strategy in the current year has been recommended.

16) The view of the consultant for the recommended change is supported by the Actuary though further changes would need a collaborative discussion between the actuary and the consultants. A funding update was received on 18 September, there has been a fall in asset value from where the actuary thought they should be under the valuation modelling, but this is not currently a concern.

17)The significant change following triennial valuation is the risk to the Fund with regard to the cashflows due to the inflation linkage to liabilities and the small reduction to contributions allowed to some employers. The Fund will see that income from activities relating to members is lower than the spend to pay pensions, so there is a need for the investments to contribute to the income of the Fund in a more significant manner going forward.

18) The Committee challenged whether the Fund had the right balance between using contributions and investments as investing would allow a level of inflation protection to existing members.

19) The Fund is maturing but is not particularly mature, a shift from accumulating to income distributing is proposed to allow the Fund to avoid the volatility of the market. The report sets out the current asset allocation and the planned strategic allocations.

20) The Actuary Report as at 31 March 2023 showed a funding position of 121%. This is a broadly similar position to the formal Actuarial Valuation Date at 31 March 2022 (when the funding level was 123%.)

21) The discount rate assumption is derived based upon the absolute level of returns that the asset portfolio is expected to achieve, with a level of actuarial prudence applied. As at 31 March 2023, the expected return of the Fund’s investment strategy is 7.8%. This is measured on a best estimate basis and is in excess of the discount rate (4.8% p.a.).

22) The Committee requested a brief document to outline the differences between the Actuary and the ISIO predictions and the methodology applied.

23) The Committee discussed that the actuary uses a 20-year inflation figure, however long-term high inflation is a risk and even at 4-6% could still be problematic for the Fund.

24) The Committee discussed cash holdings and were advised that the regulations prevent the Fund from holding cash, other than sufficient levels needed to make payments from the Fund, as part of the regulations issued in 2016.

25) The value of gilts has been volatile and now will deliver a return of RPI + 1.0% p.a. The 15-year fixed gilt now yields 4.5% vs 0.5% at the start of 2021.

26) There is a requirement to evolve the investment strategy to ensure the gap does not widen

27) Since the last review was undertaken 3 years ago there has been a significant change in the market environment. The outlook for property was positive at that time. Property investment is UK only and nearly all commercial; interest rate rises have put pressure on capital values and property prices with a low expected return going forward.

28) The Committee were advised on levels of illiquidity with approximately 30% exposure recommended.

29) The Committee were advised that the strategy will be reviewed every year and that the focus should not be what might be recommended as a result of the government consultation. It is anticipated that there will be a protracted timeline if the consultation is taken forward.

30) The Committee considered the revised Investment Strategy Statement which has been updated following the Strategy day in July. The statement needs to be up to date and valid with new strategy and has been amended to reflect the Committee’s requests.

31) It was noted the Funds two private equity managers and one infrastructure manager were not signatories to the Institutional Investors Group on Climate Change (IIGCC), Committee asked officer to follow up with those manager for a reason why they are not members.

32) The Committee discussed the limit to the number of sub-funds the pool can hold, Storebrand is currently on the list of assets held outside the pool, however it is anticipated this will be added to the pool. It is challenging to bring further products online at the moment and there are a number of sub-funds wating to come online and this can take some time – approx. 1 year. The new operator must be in place before anything further is added beyond the existing pipeline. The Committee discussed whether the pool should consider fewer multimanager sub-funds.

33) The Statement of Responsible Investment Principles were discussed and the Committee considered whether the principles applied to managers should be set out; officers advised that they will be looking at the governance principles by which managers will be held to account and will share wording prior to amending the Statement for publication.

34) The committee discussed the statements around Climate Change and will receive a suggested form of words from officers and reach agreement on this via email after the meeting. A further Biodiversity statement may be considered in future.

35) Officers agreed to consider the Committee’s comments and to incorporate these into a revised draft statement.

 

27.4     The Committee considered an update on ACCESS and noted the following points:

 

36) The formal Joint Committee was held on 4 September 2023 and members of the Pension Board attended as observers. The issue of continuity of observer membership was raised as a governance concern for the Pool.

37) A third party review by Barnet Waddingham has recently concluded, and the report will be shared at the ACCESS Joint Committee’s next meeting on 4 December 2023 and then discussed at the February Committee meeting.

 

27.5     The Committee considered a report on divestment and engagement and noted the following points:

 

38)At the July 2022 meeting the Committee requested that officers and the Fund’s external advisers conduct a piece of work concurrent with the completion of the triennial valuation which:

1.    Assessed the fiduciary and legal consequences of fossil fuel divestment for the Fund;

2.    Examined how such a move aligns with relevant guidance and advice;

3.    Explored how practical an act it would be within the context of the ACCESS pool;

4.    Reviewed evidence on the efficacy of such an approach in promoting the energy transition.

39) Isio have led on the production of this piece of work with input from the Fund’s legal advisers. The consultants produced three detailed chapters of analysis and research with the production of a summary report for publication for the benefit of the Funds beneficiaries. Attached to this report is the summary report detailing the findings of the work and a document setting out the definitions which set out what is meant within the report when certain phrases are used.

40) The Committee commissioned the report to highlight the tensions and complexities for the scheme members and to consider divestment and engagement from a fiduciary perspective to ensure that pensions are delivered in an affordable way.

41) The report was a significant piece of work and highlights that the ESPF is in a strong position already, is highly engaged on the issue and that there is plenty of good work already within the portfolio and the Fund has sought independent advice. The report considered industry evidence and open source academic material and what fund managers consider good practice to look like.

42) Within ACCESS there currently two sustainably focussed funds available and the ESPF invests in both of them and utilises them well. 

43) The Funds legal advisers provided advice within the report touching on the Fiduciary and legal consequences.

44) The need for clear definitions was highlighted as divest can mean different things to different people, so a definitions document was included to define the parameters in which terms were used with a focus on the difference between divestment and disinvestment; noting disinvestment is the removal of a holding by a manger rather than sector exclusions.

45) In achieving a low carbon position there are significant risks and limited evidence of its impact. Divestment means a blanket approach and there is currently insufficient scale to achieve the desired outcome of the divestment movement and there is a possibility it could create a situation of fossil fuel price rises which in turn attracts investment.

46) Attributing engagement activities to results is very hard to do and to identify where a specific action has been effective. It was noted that historically passive investments had limited engagement however there has been a rise in passive manager engagement with the large managers.

47) There are some pensions funds with disinvestment or divestment strategies however they have different legal structures to ESPF. ESPF’s managers do all however have disinvestment as a backstop for holdings where managers consider there to be a financial risk or that companies are disengaged.

48) Targeting assets which are anticipated to be uneconomic in the short to mid term e.g. thermal coal may be possible, but focused work is recommended to identify those asset classes where these assets are held. It was also noted that state owned enterprises represent at least 50% of fossil fuel reserves and that banks provide the majority of the required finance to fossil fuel companies.

49) The Committee discussed the growing pressure on companies from the wider divestment movement and whether the Fund should be part of that movement but were not agreed on its ability to influence at a wider level and of the evidence that would it impact the behaviours of fossil fuel companies.

49) The Committee discussed the risks of divestment from its current allocations and noted that the investment strategy model was used to look at various scenarios, there is an element of opportunity cost and a long time scale to consider. There is already lots of work with managers to try and deliver decarbonisation in practice. Currently 3% of the fund is exposed to fossil fuels, in part tactical, short term exposure to volatility. Many managers are looking at decarbonisation over time, IFM the infrastructure investment manager, has a net zero target and planned deployment to renewables from fossil fuels. Divestment would therefore include leaving these funds and they are trying to influence real world change. The Fund exposure to extraction is only 0.6% of total holdings. Newton and Ruffer are the main manager positions to have an exposure to extraction which is tactical and short time in practice; there is  ongoing engagement to deliver change.

50) Officers advised that at present divestment would compromise the current investment strategy and also carries a reputational risk and would result in a need to exit the ACCESS pool which would be costly and counter to the governments consultation.

 

27.6     The following motions were put forward by Councillor Taylor and was seconded by Councillor Tutt:

 

Proposal 1: That the Fund commits:

(a) to make no new investments in fossil fuel extractors;

(b) to fully divest from all fossil fuel extractor public equities and corporate bonds within five years; and

(c) to make no new private equity investments that include fossil fuel extractors.

 

Proposal 2: That the Fund commits:

(a) to exclude (over a reasonable timeframe) the public equity or corporate bond of any fossil fuel extractor that has failed to commit to 'no new fossil fuels' by the September 2024 Pension Committee meeting;

(b) not to make any new private equity investments in such fossil extractors; and

(c) to immediately inform our investment managers of this commitment so that they cantake whatever actions they deem necessary in response.

 

27.7     The following motion was put forward by Councillor Tutt and seconded by Councillor Taylor:

 

Proposal 3: That the Fund commits:

(a) to make no new investments in thermal coal;

(b) to fully divest from all thermal coal public equities and corporate bonds within one year; and

(c) to make no new private equity investments that include thermal coal.

 

27.8     There was no vote taken on these proposals as the Committee noted that it had not been sighted ahead of the meeting and officers and advisors could not provide advice as a result, meaning a fully governed process with advise and full information as to the financial and legal implications could not be taken.

 

27.10   The Committee RESOLVED to agree that officers should consider the proposals raised and bring a report to a future committee meeting.

 

27.11   The Committee REVOLVED to:

 

1)    Note the Quarterly performance of the Investment portfolio.

2)    Agree to change the liquid investments were possible to distribute income back to the Fund.

3)    Approve the amended asset allocation set out in paragraph 4.22 of the report.

4)    Approve the revised Investment Strategy Statement in Appendix 4 of the report.

5)    Approve the revised Statement of Responsible Investment Principles in Appendix 5 of the report subject to amendment which will be agreed by the Committee via email.

6)    Note the research into the efficacy of divestment and engagement and agreed to publish the report on the Fund’s website.

7)    Delegate authority to the Chief Financial Officer to take all necessary actions to give effect to the implementation of the above recommendations.