31st March 2022
Fund position on Responsible Investment and Fund Fossil fuel exposure (updated March 2022)
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 these take time to implement, and this is a journey for the Fund. Engagement activities are reported by the Fund on a quarterly basis.
The Fund has no exposure to fossil fuel companies within its equity portfolio – 40% of the total strategy.
The Fund has invested £500m into climate impact funds as at 31 December 2021.
The Fund was the 2021 winner of the LAPF ‘LGPS Fund of the year (over £2.5bn)’ and was highly commended for its Climate Change Strategy.
The Fund were signatories to the Investor Agenda’s 2021 Global Investor Statement to governments on the Climate Crisis, urging governments to rapidly scale up their climate ambition.
The Fund does not directly invest in any specific company; instead, it invests through a combination of holdings in:
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, but investors can consider the type of index in which it may want to invest.
To divest from a single company within an index fund or pooled fund would require the Fund to divest from the whole strategy which would:
Rather than traditional passive index’s that will hold any company (regardless of their ESG credentials), the Fund instead invest in two more specialist funds.
The first of these is Storebrand who have explicit exclusions in their strategy which include the exclusion of:
Investments are then tilted towards high EGS and low carbon footprint scoring companies. In addition, the manager invests 5-10% specifically in stocks that facilitate the transition to a low carbon economy.
The second index manager is UBS Asset Management acting as Investment Manager, advised by Osmosis Investment Management. The strategy is fossil fuel free and excludes companies that:
The Funds investment strategy crosses a wide range of investment types, each of which will have different climate risks. Climate risk to the Fund is through both physical risk and transition risk.
Type of risk
More frequent or severe weather events – flooding, storms, droughts, wildfires, chronic heatwaves, sea level rise.
Changes to less polluting greener economy – loss of asset value in hard to abate industries or as a result of policy constraints on activities of a business, increased costs of business supply chains, loss of access to materials, regulatory tax penalties.
The Funds investment strategy showing the types of assets are shown below:
Global Equity - 43%
Absolute Return/Diversified - 22%
Debt/Credit - 15%
Property - 8%
Private Equity - 7%
Infrastructure - 5%
Cash - 1%
Climate risk can impact on all these assets.
Example 1 – Property
In the property allocation there may be physical risk with buildings in areas that may have an increased chance of flooding with extreme rainfall or sea level rises; or transition risks through the cost of retrofitting buildings with heat pumps or hydrogen boilers to replace gas heating systems.
Example 2 – Infrastructure
An Infrastructure portfolio would be affected by atmospheric and marine hazards leading to operational shutdowns and subsequent financial losses.
Example 3 – Global equities
A Global equities portfolio could include shares in an agricultural company, a technology company or even an energy provider. Every company would face different climate risks; either to their physical geographical location, to supply chain costs and failures or regulatory or policy risk imposing penalties or restrictions to operations.
As a result of the wide-reaching climate risks, the Fund takes a holistic view of its investments rather than focusing on a single company sector and focuses on the quality and ability of the investment manager teams who carry out the detailed research and selected the underlying companies in the portfolio.
To do this the Fund:
And we are due to start climate scenario analysis of the portfolio.
The Fund also considers engagement with companies to align their businesses to aspects such as corporate governance standards, ensure best practice in labour force polices or alignment with the Paris agreement on climate related emissions. A list of the Funds collaborative engagement partners is listed further below and the Fund publishes reports on engagements and voting carried out by managers where we are able to publish this information.
There are also climate opportunities. For example, companies which improve resource efficiency in relation to energy usage, water and waste management can result in a better run business with cost savings and competitive advantages. Or investment into innovation in technology can assist the energy transition such as development of electric vehicles, advances in LED technology, geothermal power. Other opportunities can include investment in renewable energy sources such as solar, wind, bio-fuels as to meet global reduction targets energy generation source needs to move to clean energy sources and away from burning of fossil fuels.
The Fund has taken substantial measures 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, or £500m, 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, the Fund has removed all of its traditional passive index equity exposure (where there is unconscious exposure to fossil fuels) and now utilises fossil fuel free indexes.
Current Position of the East Sussex Pension Fund on Divestment
The Fund has a policy of Engagement over Divestment. Where engagement fails, divestment is an option as the last escalation point after targeted engagement, voting at AGM’s, co-filing resolutions at AGM’s. The Minister for Pensions explicitly discourages blanket divestment as a broad strategy, favouring instead strong company engagement among other reporting requirements. This view is also held through other governmental bodies as well as Fund advisers and collaborative groups, who favour engagement as a tool for asset owners.
Selling an investment in an oil company or a high intensity carbon emitter does not stop the emissions occurring or change real world carbon emissions, as it does not reduce the global demand for those fossil fuels, it instead moves the problem elsewhere – either to an investor who is less climate conscious or to increase the market share of national oil companies who are less transparent about their activities and have higher carbon footprints per unit of fuel on average than listed fossil fuel companies.
There have been significant moves in the right direction of several fossil fuel companies as a result of active ownership by investors. Research published by the Transition Pathway Initiative in November 2021 finds that “three oil and gas firms – Occidental Petroleum, TotalEnergies and Eni – have set emissions reduction targets which are ambitious enough to reach net zero by 2050 and to align with TPI’s 1.5°C benchmark”.
The Pension Fund believes that by exercising its powers as shareholders we can influence high emitting companies to effectively transition a low-carbon world and actively reduce real world carbon emissions. This can be done by investors bringing shareholder resolutions on climate disclosures and climate strategy and by voting against management or auditors where climate strategy is insufficient. An example where engagement is starting to see some results is with the vote to put three people who have expertise and experience in transitioning away from fossil fuels on the board of ExxonMobil in 2021. The Funds Investment managers voted on our behalf to help make this happen. Since this change in Board membership ExxonMobil are no longer planning to increase oil production in the years to 2025 and has started to invest in decarbonization strategies with targets for greenhouse gas emission reductions. There is still a long way to go but this shows a marked change in the company as a result of this active ownership.
As a UN PRI 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.
Where engagement fails, the Fund has seen its active managers and the new smart beta passive allocation take decisions to exclude certain companies.
There are limits to the influence that we can achieve as a single investor and the resources we can reasonably commit. We recognise that progress can be best achieved on ESG issues through collaboration with other investors and organisations. We’re an active member and supporter of several Global and Industry ESG Initiatives.
Principles for Responsible Investment (PRI) - PRI
We’ve been a signatory to the PRI since 2020 and are working on our first submission on how we implement the six Principles of Responsible Investment into our everyday work to be good stewards of capital. PRI is an important partner, providing excellent guidance on responsible investment and we work closely with them on the future direction of the organisation.
Institutional Investors Group on Climate Change (IIGCC) - IIGCC
IIGCC has the collective weight of over €35 trillion from 275 members and is leading the way on a global stage for investors to help realise a low carbon future. IIGCC helps shape sustainable finance policy and regulation for key sectors of the economy and supports members in adopting active ownership and better integrated climate risks and opportunities into investment processes. The Fund’s Pension Committee Chair is currently a representative on the IIGCC Corporate Programme Advisory Group. The corporate programme focuses on supporting investors to engage with companies to align portfolios with the goal of net zero by 2050. In addition to the Fund’s own membership of IIGCC, the Fund asks its managers to also be members providing a double lock on engagement.
Local Authority Pension Fund Forum - LAPFF
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. In October 2021 the Funds Head of Pensions was appointed to the executive committee as an LAPFF Officer Member.
Pensions For Purpose is a bridge between asset managers, pension funds and advisers, to encourage the flow of capital towards impact investment. Pensions For Purpose provide high quality expertise and training to Funds on ESG issues. The Fund joined as an affiliate member in September 2021.
Governance and Decision making
If you would like further information on the governance and decision making of the Pension Fund please see the 'About the Pensions Fund' section on our website which provides details on the Pension Committee.
For further information about the Funds Investments please see: