The following statement was made by Julia Hilton, on behalf of Divest East Sussex, at the 4 September 2017 meeting of the East Sussex Pension Committee.
1. Summary of year’s activities
A year has passed since Divest East Sussex first presented our petition calling on the ESPF to divest its holdings in fossil fuels. Since then another two of your employers have called on the fund to divest, Brighton and Hove, and Lewes Town council as well as the earlier motion by Hastings borough council. At their spring conference UNISON, who represents many local pension fund holders passed a motioni which as one of its five points:
‘Calls upon our local LGPS [Local Government Pension Schemes] to invest safely for pension holders’ wellbeing, by divesting fossil fuels over five years and reinvesting into the just transition, giving due regard to fiduciary duty…
We have provided the pension committee with draft proposals for your Investment Strategy Statement including a climate change policy. You have changed your ISS so that it recognizes the financial risk that climate change poses and promised to consider and discuss our more detailed proposals housed in the documents first sent to the committee in February this year.
Officer’s response to petition
Your officer’s report on ESG for this meeting states that
‘From the Fund’s perspective, simply disinvesting from a particular category or group of companies is likely to reduce the Fund’s ability to secure the best realistic return over the long term. Furthermore, it denies the opportunity for the Fund to influence companies’ environmental, human rights and other policies by positive use of shareholder power, ‘
This statement ignores the reality that climate change is a material financial risk and has to be assessed as such not solely on environmental criteria. This has been clearly stated by many financial regulatory bodies and is also now recognized in your own ISS.
Your report also claims that disinvesting from a particular category or group of companies is likely to reduce the Fund’s ability to secure the best realistic return over the long term. We would urge you to put this to the test by asking your investment managers the same question as that posed by Waltham Forest’s pension committee:
‘Can we meet our investment strategy objectives if we divested current investments in fossil fuels and invested in other vehicles, including sustainable and green investment options.’
Mercer’s analysis of the market made clear that they could.
On engagement, your officer’s report also states:
‘The approach of direct and collaborative engagement contrasts with the approach of blanket divestment advocated by the campaigners. Once an asset owner divests, their ability to influence both the short and long-term direction of individual companies and the national and international energy sector is severely curtailed.’
Considered purely from an investment perspective, divestment is a somewhat broad brush stroke approach. However, it also has many virtues. Crucially, of course, it eliminates a real, systemic – and almost certainly unnecessary – risk from the Fund’s investments. It is an approach rooted in an understanding that these companies are currently a major – perhaps the major – obstacle to the energy transition taking place on the timescale necessary to avoid catastrophic climate change. It is also relatively simple to implement.
By contrast, attempting to deal with these risks by “engaging” with fossil fuel companies is complicated, highly unlikely to succeed and retains these systemic risks if it fails.
At the Pension Committee’s 13 June 2017 training day on ESG issues and climate risk, Legal and General Investment Management explained that ‘engagement to address climate risk’ required action to be taken on ‘poor performers’, and that such action could include divestment ‘from some funds’.
Given that you favour engagement, we would be interested to know, with respect to climate risk, what you think the red lines should be that would trigger divestment from a particular fund. For example, if a company were found to be spending tens of millions of dollars each year on advocacy designed to obstruct climate change policy, should that trigger divestment? Likewise, if it was discovered that 50 – 60% of an oil companies’ capital expenditure for the period 2017 – 2035 might fail to deliver an acceptable return in a 2° C scenario, should that be a trigger for divestment? As at 30 April 2017 the Pension Fund had investments in companies meeting each of these criteria.
Are you convinced that the fund managers managing your investments have a full understanding of the climate change risks facing the oil, gas, mining and utility companies they are investing in on your behalf? Have they presented sufficient evidence to you that has convinced you that they are tracking these risks – from legal and regulatory risks, to strategic and market risks, and operational risks, and properly factoring them into those companies’ valuations? Have the investment managers considered various scenarios for those companies’ futures, and are they actively monitoring which of those scenarios looks most likely to come to pass?
For engagement to be useful to the fund it is essential that there are measurable goals in place. To enable the fund to fulfill its fiduciary duty and demonstrate that it is actively addressing climate risk we would suggest that the pension committee agrees to adopt a climate change policy as an appendix to their ISS.
This would state that:
‘The Fund’s objective in relation to climate change is to ensure that its investment portfolio and processes are compatible with restricting rises in global average temperatures to well below 2°C relative to pre-industrial levels, in-line with international government agreements, which the UK government supports.’
The key targets would be:
1. By 2020, to decarbonise the portfolio in line with achieving a maximum 2 degree rise in global temperatures, in line with the Paris Agreement on climate change.
2. To proactively seek low carbon energy and other climate mitigation opportunities that are compatible with the Fund’s financial objectives on an ongoing basis.
3. From 2018, require all fund managers to actively engage with companies in their portfolios with the objective of reducing their emissions and climate impacts, and to report to the fund on that engagement in a standard comparable format.
These would all be positive steps showing that the pension fund is actively responding to the financial risks implied by climate change.