Agenda item

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

 

26.2       The Committee discussed the progress made by the Fund over the last 6 months to reduce carbon emissions, with a greater focus on energy transition and sustainable investments. The Fund is currently in a market leading position for sustainable investment which would help drive long term performance. However, in the short term there had been a significant impact on the performance of the Fund, much contributed to by the situation in Ukraine due to the Fund’s limited exposure to fossil fuels and value stocks.

 

26.3       The following Motion was proposed by Councillor Taylor and seconded:

·         Note that the Fund has already made much progress as a climate friendly fund, and that several of the Fund managers are taking concrete steps to minimise exposer to fossil fuel assets, but more needs to be done.

·         To fully divest from the top 200 publicly-traded fossil fuel companies (including any commingled funds that include fossil fuel public equities and corporate bonds) within 5 years, and that officers and advisers will explore a safe and prudent pathway towards this divestment over the next five years, bearing in mind the Fund’s fiduciary responsibility to its members.

·         To develop a policy around engagement that sets out possible escalations if engagement is unsuccessful.

 

26.4       The Committee considered a number of arguments for the divestment of investments held in fossil fuel companies, including:

 

·         The Climate Act requires all Councils to reach net zero by 2050 and so the Fund should comply with the requirements the Act.

 

·         Engagement with fossil fuel companies is not progressing at the desired speed and the Fund is not investing in renewable energy on the scale needed. An engagement policy is required to ensure that clear policy objectives are outlined for when companies do not comply with the standards of the Fund.

·         Fossil fuel companies continue to extract oil as well as exploring new extraction opportunities. It would therefore be important to clearly demonstrate to the sector that this would not be tolerated and does not comply with the standards of the Fund. If the Fund were to publicly state its concerns regarding fossil fuels and global warming it would demonstrate a stand against the sector with the potential to generate wider action.

·         By making a commitment to divest over the next 5 years, the Fund can carefully consider its fiduciary duty and options for new investment pathways. Investing in sustainable growth funds would be essential to ensure positive returns over the longer term.

·         The largest impact of divestment would be now. The current inflationary environment and energy crisis has caused a rise in fossil fuel shares over the last years. The Fund has also made significant changes to its portfolio already which would mean divestment would be less of a risk now than previously.

 

26.5       The Committee considered a number of arguments against the divestment of investments held in fossil fuel companies, including:

 

·         The Fund operates under guidance from Government departments including the Department for Levelling Up Housing and Communities and the Department of Work and Pensions (DWP) and investment advisors, none of which advise divestment and so, operates fully within the law and in line with national government requirements.

 

·         Impacts of the changes made to the Fund’s sustainability over the last six months were beginning to emerge. However, until the real impact could be assessed it would not be prudent to make significant changes to the portfolio until the impact of the current implementations were clear.

 

·         The Committee discussed the Fund’s engagement policy noting that this had been successful in changing corporate behaviours. An example of this is Ruffer, whom in 2020 undertook engagement with Exxon Mobil whom at that time was not willing to make Ruffer’s proposed amendments. Ruffer consequently divested from the company and has focused on investing further in renewable energy companies instead.

·         Energy companies will play a significant part in the renewable energy transition. Equally, fossil fuels remain a part of the supply chain involved in creating renewable energy sources and infrastructure. As a result of engagement, many of these companies are working to make the transition to becoming an energy company rather than a fossil fuel company and as such, require support in their transitionary period. By way of example, BP targets 50GW renewable energy capacity by 2030, Total 35GW by 2025 and Equinor is aiming for around 15GW by 2035.  The renewable technologies that such companies seem particularly well-suited to contribute to, and are demonstrably engaged in, include: closed loop geothermal, offshore wind, floating offshore wind, hydrogen electrolysis, and Carbon Capture and Storage.

·         The Fund is part of the ACCESS pool and therefore, to divest, investments would have to be taken out of the pool in order to cut fossil fuel investments, which would be against government direction to pool LGPS assets. Although the Fund’s exposure to fossil fuel is low, the relevant remaining asset classes are less likely to have fossil fuel free options as the Fund has already removed fossil fuels from equities which is the first asset class to offer sustainable alternative.. The Fund would need to go through segregated mandates to implement such a strategy, with details of the costs being unknown.

 

26.6       The Committee was advised that divestment was likely to have significant financial implications for the Fund and it was recommended that a detailed analysis be completed to review the implications of a potential divestment policy to ensure the Fund was able to comply with its fiduciary duties Early evidence suggested that divestment had not been an effective approach as this enabled ownership of oil and gas companies to move into private ownership, which could result in less scrutiny.

26.7       William Bourne, Independent Adviser to the Pension Committee fed back that it remained important that the Committee is consistent with their fiduciary duty and have considered proper advice from investment advisors before making decisions. A full divestment policy would not be consistent with the Committee’s fiduciary duty as the Fund’s portfolio should remain diversified, with the opportunity to invest in fossil fuel companies if required. Investment managers are responsible for driving engagement and it is down to the managers to divest if the engagement process is unsuccessful. A Motion passed by the Committee to divest would need to evidence that the implications do not include any financial detriment and would require majority support from members of the Fund, neither of which could be evidenced at this point in time.

26.8       The following amendment was proposed by Councillor Fox and seconded:

26.9       The Committee resolves to ask officers and the Fund’s external advisers to conduct a piece of work concurrent with the completion of the triennial valuation which:

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

36.           

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

 

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

 

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

37.           

26.10    The amendment was put to the vote and the Committee RESOLVED to agree the amendment. The Committee noted that it would be essential to look at a range of different sources when reviewing evidence in relation to divestment. The report should be completed in line with the triannual valuation and reported to the Committee in quarter 2 of 2023.

26.11    The following amendment was proposed by Councillor Tutt and seconded:

 

In principle, propose to divest from all fossil fuel companies excluding utility companies and to use that money to invest in green infrastructure funds subject to advice from the Fund’s professional advisers.

38.           

26.12    The amendment was put to the vote and LOST.

26.13    The Committee RESOLVED to:

1)    note the Investment Workplan (appendix 1);

 

2)    note the Quarterly Investment Report from the Investment Advisor, Isio (appendix 2)

 

3)    note the investment strategy review (appendix 3) and agree the following amendments to the implementation plan for the investment strategy:

·         maintain the absolute return mandates until the infrastructure equity mandate is drawn;

 

·         to continue using the corporate bonds to fund the new diversified credit mandate;

 

·         retain the index-linked gilt allocation over the short term;

 

·         trim the core property exposure and hold this in index linked gilts until decision made on inflation-linked property;

 

·         re-visit the case for inflation-linked property in the current environment ahead of implementing the strategic allocation.

 

4)    note the equity performance and investment outlook considering investment style and exclusions;

 

5)    note the update on the Carbon footprint of the Fund;

 

6)    note the Q1 Engagement Report (appendix 4);

 

7)    approve that officers make a submission of the Stewardship Code to the Financial Reporting Council (FRC);

 

8)    note the External Assurance report update;

 

9)    note the ACCESS update;

 

10) delegate authority to the Chief Finance Officer to take all necessary actions to give effect to the implementation of the above recommendations; and

 

11)to ask officers and the Fund’s external advisers to conduct a piece of work concurrent with the completion of the triennial valuation which:

 

·         assesses the fiduciary and legal consequences of fossil fuel divestment for the Fund; 

 

·         examines how such a move aligns with relevant guidance and advice;

 

·         explores how practical an act it would be within the context of the ACCESS pool; and

 

·         reviews evidence on the efficacy of such an approach in promoting the energy transition.