Agenda item

24.1     The Committee considered a report on Divestment Proposals introduced by Sian Kunert who drew the Committees attention to the following points:

1) There is a Pensions review underway and this introduces several risks to the Fund.

2) The Fund must invest in its LGPS pool, the management and control of the investment management agreement details are decided by the pool and not the Committee.

3) There is some subjectivity to the classification of what exposure to thermal coal or fossil fuel extraction is from managers which has made things more complex where one manger identifies a company with exposure and another holding the same company not identifying.

4) The Fund does not invest in any company but through investment  products arranged by Investment Managers. Divestment would be from an Investment strategy;not a company. The costs associated with divesting from an Investment manager, product or strategy are set out in the report.

5)  The costs set out within the report would be applicable at the point the Fund were to divest from a manager and relate to transaction costs to sell an investment product and procurement costs to select a new investment product, they would not diminish if divestment took place now or in the future as they are common costs associated with changing an investment position. These are additional costs to those that were set out in the report presented in September 2023 which looked at costs associated with a change in investment returns and loss of value as a forced seller through the secondary markets – which would be lower if a divestment strategy took place over a number of years. The report also highlights the value of assets that would need to be sold to remove the limited exposure to areas a divestment decision would aim to remove.

6)  The Government favour more pooling within Funds and an exit from the pool is not feasible.

24.2     The Committee noted that the report commissioned by the Pension Committee which was received in September 2023 incorporated:

1)  The Fiduciary Duty of the Fund and its duty to generate returns.

2)  A literature review assessing the academic literature available which highlighted that neither engagement nor divestment have been effective to date and that behavioural change was required.

3) The financial implications to remove asset classes or impact on returns to change to sustainable strategies.

24.3     The following points were made in favour of the proposals set out within the report:

1) Having a divestment statement and commitment is important to support Carbon reduction. There is already a strategy and target agreement in line with the Paris agreement.

 2) Stigmatisation of fossil fuel extraction would create a build-up of support. Fossil Fuel extraction should be treated differently to other assets. 

3) The Fund should not seek to exit the pool but pursue the other products becoming available to the pool. 

4) Continued investment in companies who extract fossil fuels could increase the risk to the Fund and represent a danger to the Fund especially if there is more regulation and policy on pricing of carbon.

5) The Fund could consider exploring other mandates with managers to support this divestment, engagement is not effective and disinvestment is already one of the Fund’s policies if companies are not responding to manager requests.

24.4     The following points were made against the proposals set out within the report:

1) The Committee must consider whether these proposals support their Fiduciary Duty to produce a return on investment. The Fund has a greater tilt to energy transition than other funds and performance has not been strong in the last three years on the sustainable mandates due to their growth nature; the Fund should not be forced in a direction where it clashes with Government policy by seeking to go beyond its current structure.

2) The Index funds are fossil free to avoid structural exposure. There are discretionary investment opportunities afforded to managers which is why the exposure can can move from 0 – 2%. Those managers are entrusted to make sound investment decisions and not to invest in products offering poor returns or exposing the Fund to risks.

3) Stigmatisation is a difficult basis on which to make a Fiduciary decision; Trustees must look after Fund members’ deferred benefits and an income deficit would become problematic to ensure paying pensions by around 2030.

4) The Fund has been judged to be well run and should not act in a way which exposes employers to making higher contributions.

5) The Pension Board does not support limiting the choice of managers and potential of returns in the future as the proposals would reduce the options to invest in private equity and potentially other investment classes. The Fund has made excellent progress, far more than other Funds and officers could work with ACCESS to support other Funds in this area. The challenging work of officers should be recognised and decisions about the Fund should not be politically motivated.

24.5     The motions were put forward by Councillor Taylor and were seconded by Councillor Tutt for the Committee to consider.

24.6     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.

24.7        The proposal was put to the vote and LOST (By 3 votes to 2).

24.8     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 can take whatever actions they deem necessary in response.

24.9        The proposal was put to the vote and LOST (By 3 votes to 2).

24.10   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.

24.11   The amendment was put to the vote and LOST (By 3 votes to 2).