Queries about fossil fuel investment

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There has been widespread media coverage following publication of a report from Platform and Friends of the Earth. The report highlights investment of local government pension funds in ‘fossil fuel’ companies and encourages divestment. Information was uploaded to the UK Divest website. The site allowed viewers to send templated letters to councillors with respect to fossil fuel investments.

UK Divest reported the Leicestershire County Council Pension Fund to have ‘fossil fuel’ investments of £154m on 31 March 2020 or 3.7% of the fund’s total investments of £4.1bn.

Officers have contacted the authors to understand the assumptions and estimates that are contained within the fossil fuel value reported.

Officers have ascertained that the value for fossil fuels reported is overstated. The analysts at UK Divest have made assumptions regarding the percentage of each investment that is invested in companies related to fossil fuels. For example, LaSalle, who only manage property holdings on behalf of the Fund have been assumed to hold £5.3m in companies exposed to fossil fuels, such as Shell and BP.

Of the Fund’s total value of £4.1bn on 31 March 2020, £0.5bn or 11% has been analysed without applying estimates and so can be deemed accurate. The remaining 89% of the Fund’s investments have had an estimate applied. This has invariably led to the value being overstated as investment managers with no fossil fuel exposure have been assigned an amount. With analysis covering all pension funds, a degree of estimation was inevitable, but the Leicestershire Fund is likely to have been impacted more than most, due to a significant level of non-equity investment.

The actual holding of the Fund will be closer to half the figure published by UK Divest. Since March, the Fund has transitioned a significant value of assets into a LGPS Central Climate Balanced Fund which aims to reduce exposure to fossil fuels, which will have further reduced the Fund’s fossil fuel exposure.

Our response

The answers below set out the situation in Leicestershire:

Do you agree that the council should divest its pension fund from fossil fuels?

With respect to divesting from fossil fuel companies, the Leicestershire Pension Fund (the Fund), as a responsible owner, has a strategy of engagement with companies to improve their stewardship, rather than simply excluding them from the investment portfolio. This approach is more compatible with fiduciary duty and more supportive of Responsible Investment (RI), as it provides the opportunity to influence companies, something that isn't possible if the investment is simply sold.

The Fund will only employ investment managers that align with our own policies and have shown to have strong Environmental, Social and Governance (ESG) policies in place. In this regard, the fund recognises climate change as a key risk and requires managers to do the same.

Investing with funds that are administered by LGPS Central strengthens the approach to RI. The Fund is a part owner of LGPS Central and can shape the design of investment products to ensure that the Fund’s RI policies are incorporated. By combining financial resources with other pension funds, through LGPS Central, greater influence can be exerted over the companies invested in.

A recent development that the Leicestershire Fund has participated in is the launch of an investment product that has a climate focus but also low costs of ownership - the LGPS Central Climate Balanced Fund. This product supports the Fund to balance its fiduciary duty on behalf of LGPS employers, who fund any financial shortfall, and management of climate change risks.

The Fund manages climate change risk through robust investment stewardship, in order to positively influence company behaviour and enhance shareholder value. There are three avenues to our stewardship, each of which recognises that stewardship is more effective when engaged with a collaborative slant.

a) Use of external Investment Managers

As an externally managed pension fund, the Investment Managers contracted by the Fund are instructed to exercise, on behalf of the Pension Fund, all rights (including voting), having regard to the best long-term financial interests of the Fund. This includes factors relating to climate change and climate policy. The Local Pension Committee will not appoint any investment manager, unless they can show evidence of being able to fulfil the Fund’s investment objectives, including its Responsible Investment objectives.

b) Membership of the Local Authority Pension Fund Forum (LAPFF)

The Fund is a member of the LAPFF. LAPFF’s work on climate change spans engagement, AGM attendance to raise climate change issues with investee companies, collaboration with partners and consultation with regulators and other influential bodies. LAPFF issues a publicly available Quarterly Engagement Report.

c) Engagement through LGPS Central 

The Fund is a part-owner of LGPS Central, the asset pool of which the Fund is a participating member. With the Fund’s support, LGPS Central has developed a leading approach to responsible investment and has identified climate change as one of its stewardship themes. This includes active participation in the Institutional Investor Group on climate change, advocacy on UK climate policy through the Green Finance Initiative, development of the Transition Pathway Initiative, and working with investors worth $30tn in assets on the Climate Action 100+, an initiative led by investors to engage systemically important greenhouse gas emitters to drive the clean energy transition and help achieve the goals of the Paris Agreement. LGPS Central’s Quarterly Stewardship Report is publicly available.

What steps is the council taking to end fossil fuel investments and invest in a green and fair local recovery?

The recognition of climate related risks started well before the Covid pandemic. Similarly, investing in 'green' infrastructure, such as solar farms, is something that the Fund has done for several years. The pandemic has undoubtedly accelerated the move towards ‘green’ industries and the Fund’s investment managers are expected to respond to this.

An example is the sizeable investment into the mentioned LGPS Central Climate Balanced Fund in December 2020. One of the aims of the product is to gain greater exposure to companies with ‘green revenues’ and also reduce exposure to companies with carbon emissions and fossil fuel reserves. This investment amounted to £750m and is the largest transition the Fund has made to a LGPS Central product.

The Fund’s policy is to invest globally and across many asset classes to ensure it participates in a wide range of asset classes, in order to meet the primary objective of the Fund which is to provide pension and lump sum benefits as and when they fall, due for members or their dependents. Investing globally and across a spectrum of asset classes provides the Fund with a greater range of opportunities and diversification, in order to weather any market shocks. Whilst the Fund doesn't discount local investment, they must be attractive compared to those global opportunities, otherwise an increased financial burden falls on local public sector bodies who are ultimately funded by tax payers.

What steps will you take personally to ensure this issue is on the agenda of the council’s Pension Fund Committee?

This matter has been raised with the Chair of the Pension Committee who has provided assurance that RI is incorporated into the investment decisions, made by the Fund, and the Committee have the opportunity to challenge and shape decisions to ensure that climate change is taken into account. The Committee has a keen interest in the topics you have raised, together they help shape our current and future RI strategy.

The Fund has an RI improvement plan that is approved by the Committee at the start of each year. This RI plan is reviewed and progress monitored and reported on at each quarterly committee meeting, with the aim of improving the management of the companies that the Fund is invested in.

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