ESPF Responsible Investment and Fund Fossil fuel exposure
Responsible Investment Principles
The Fund has a detailed Statement on Responsible Investment Principles that helps guide decision making and reporting which covers all Environment Social and Governance (ESG) risks the Fund must take into account. The Fund continues to make changes and developments in its strategy and reporting in relation to climate, as well as other ESG risks, but changes do take time to implement and this is a journey for the Fund.
Position of the East Sussex Pension Fund - Fossil Fuel Exposure
The Fund has steadily reduced the already small share of its portfolio invested in fossil fuel companies. In 2015 it was reported that the Fund had fossil fuels exposure of 6.6% of the portfolio value, this exposure represented just 4% of its assets in June 2020 and has now fallen to 1.9% as at 31 December 2020, or around £75m. Of the 1.9% exposure, 1.2% is within Equity holdings or Absolute Return funds. The Fund must monitor and manage the risks of the Fund investments and its primary fiduciary duty is to ensure we are able to pay our members pensions when they fall due. The Fund has achieved better than benchmark returns in the last five years and enjoys strong solvency levels where the Fund was 107% funded at the last valuation date, an increase from the 92% in the previous valuation cycle.
The Fund does not directly invest in any specific company; instead it invests through a combination of holdings in passive index funds and active fund managers. An investment to a passive index means exposure to all companies within the index, there is no ability to divest from any specific company within it; to divest from a single company within the index would require the Fund to divest from the whole strategic allocation which would be costly and potentially increase the risks to the Fund with a significantly reduced scope for the Fund to invest. Most of the Fund’s exposure to fossil fuel companies has historically been within the passive index funds, this aspect of the exposure now sits at 0.7% of the total Fund value.
The Fund has taken substantial measures in the past 18 months to better align itself with the challenges of climate change and the energy transition and is considered one of the leaders in this space in its actions. These actions include investing 25% of the equity funds in Impact Managers who select companies whose core products or services achieve a positive impact on the environment or socially, or those companies that provide solutions to sustainability challenges. In addition, half the Fund’s index equity exposure (where there is unconscious exposure to fossil fuels) has been invested into a fossil-free smart beta equity strategy that aims for long-term alignment with the Paris Agreement goals and exhibits lower carbon risk with climate solutions and higher ESG scores than the world index.
In addition, the Fund has committed to regularly carbon foot print its portfolio and have become a United Nations PRI (Principles for Responsible Investment) reporting signatory. The Fund is an active member of the Institutional Investor Group on Climate Change (IIGCC) which seeks to promote shareholder engagement with the largest 160 carbon intensive companies, asking them to better align their long run operations with net zero ambitions. The Fund insists that its Active Fund Managers are also IIGCC aligned. Several IIGCC/Climate Action 100+ motions will come before company Annual General Meetings in 2021. Where engagement fails, the Fund has seen its active managers and the new smart beta passive allocation take decisions to exclude certain companies.
Report on Responsible Investment by the Independent Adviser - February 2021
Current Position of the East Sussex Pension Fund on Divestment
The Fund has a policy of Engagement and not Divestment. The Minister for Pensions gave a clear steer in a speech to the Professional Pensions Investment Conference in January 2021 about how he expected Funds to deal with climate-related risks. The approach that he outlined explicitly discourages blanket divestment as a broad strategy, favouring instead strong company engagement among other reporting requirements. The minister reiterated this stance in an interview with the Financial Times on 4 March 2021 where he was quoted to have said “I massively believe that it is perfectly appropriate for trustees to hold stocks in the likes of Shell or BP; I do not want them to divest,” reiterating the importance to drive these companies to find solutions to a net zero future through engagement. Changes in direction of oil companies, including for example BP in its successful bid for options to build two offshore windfarms in the Irish Sea and Shell being the first company in the energy sector to submit an energy plan for an advisory vote to shareholders, suggest that the oil and gas majors are starting to take the climate crisis more seriously and supports the Fund’s current view that engagement is a very strong tool in helping influence these large firms and other high carbon emitters in realigning their businesses.
The UNPRI, LAPFF & IIGCC all favour engagement over divestment as a tool for asset owners; with divestment being a last resort in an escalation process of engagement where required and possible - noting that divestment is not possible for passive managers but the use of voting rights is powerful in this absence. The most recent Department of Works & Pensions Pension Fund Guidance promotes a similar position. The Fund’s Independent Adviser and both the previous and current Investment Consultants also endorse this view of engagement. All the Fund’s Active Equity Fund Managers are members of IIGCC.
As a UNPRI signatory, principle 2 encourages signatories to be active owners and incorporate ESG into their decision-making policies and procedures, including engagement with companies and exercising voting rights. PRI advise that “Active ownership is generally regarded as one of the most effective mechanisms to reduce risks, maximise returns and have a positive impact on society and the environment.” In addition, Divestment alone can remove an investor’s voice to be able to influence responsible corporate practice.
It is suggested by some that neither engagement or divestment alone are the solution and that opportunities instead, may be the better approach. Looking for companies that can generate a positive environment or social impact can help provide solutions to the climate challenge. The Fund has been working to reduce its exposure to fossil fuel companies, but not solely with the focus to remove those fossil fuel companies. The Fund has been reducing the carbon impact of its portfolio across many industries as the climate change risk is much further reaching than a single industry. In addition, the fund has invested in two new impact funds focussing on opportunities to find solutions.
The Fund currently have exposure to fossil fuels of 1.9% as at 31 December 2020; while the Fund have 10% invested in a strategy that aims for long-term alignment with the Paris Agreement goals through climate solutions and 10% invested in impact funds, investing to achieve a positive impact on the environment or socially, or those companies that provide solutions to sustainability challenges.
The Pension Committee, agreed to remove the remaining passive index, which has unconscious exposure to high carbon emitting companies and has no ESG / RI filter, from its portfolio at the meeting on 1 March 2021, instructing officers to investigate the implementation of a resource efficient strategy or move this allocation further into active management; which should further reduce the carbon footprint of the portfolio.
New investment managers - Storebrand press release
LAPFF - Local Authority Pension Fund Forum
As a member of LAPFF the Fund works together with the majority of LGPS funds and pools across the UK, through the forum, to promote high corporate governance standards to protect the long term value of local authority pensions. With member fund assets exceeding £300bn, the forum engages with companies and regulators to deliver reforms advancing corporate responsibility and responsible investment.
Here is a link to the latest post from the LAPFF "Protecting pensions against climate risk exposure" (1 March 2021)
Governance and Decision making
If you would like further information on the governance and decision making of the Pension Fund please see our About us section which provides details on the Pension Committee.