Agenda item

Report of the Chief Operating Officer. The fund has a passive approach to equity investing using market capitalised based indices.  Concern has been raised as to the future performance of carbon intensive industries as Governments world-wide take action to manage the risk of climate change.  The Council is a supporter of reducing carbon emissions and the Pensions Committee has been asked to consider the implication of the Paris summit on its investments in carbon intensive industries.  This paper considers alternative approaches to managing carbon exposures and reducing the associated risks within the fund’s investments.

The Committee considered the report on low carbon investing, as circulated. Following on from a discussion around ethical investments at a training session in October 2015, the Chair advised that Friends of the Earth had been invited to address the Committee briefly on this topic and asked Quentin Given, Friends of the Earth, to speak.

Mr Given addressed the Committee on behalf of Friends of the Earth and Sustainable Haringey, and welcomed the report and the proposals arising from it. It was recognised that, were the Committee to approve the recommendations of the report, this would send a positive signal to other Funds in support of moving to low carbon investing. The need to limit global warming had been recognised at the 2015 United Nations Climate Change Summit in Paris; achieving the limits agreed at that summit would necessarily lead to a decline in the fossil fuels industry and a decrease in the valuations of companies involved in this sector and it was important for Funds to take action at an early stage. Mr Given felt that engagement with companies entirely dependant on the exploitation of fossil fuels was unlikely to be effective. Mr Given hoped that the Committee would approve the recommendations of the report as a first step, and advised that Friends of the Earth and Sustainable Haringey would continue to press for further movement of funds towards low-carbon investment options. Following a petition signed by more that 2,500 individuals, a debate on this issue would also be held at Full Council in March 2016. 

The Chair thanked Mr Given for addressing the meeting. Cllr Bevan advised that the Council had participated in the Local Authorities Pension Fund Forum (LAPFF) since last year, and that this was a very powerful way for Funds to engage with companies and was having an effect on behaviours. It was noted that there was an argument that this was an alternative way of proceeding as opposed to divestment.

The Committee asked why the report recommended an implementation plan to switch one third of passive equities into a low carbon index. Mr Bruce advised that the timing of any switch in funds was important, as market volatility could affect prices significantly. A phased transition was therefore proposed in order to minimise the risk of the transferred funds being unduly affected by specific market conditions, and one third had been assessed by officers as a reasonable initial proportion. Steve Turner, Mercer, advised that one third of the passive equities mandate would represent 20% of the Fund’s portfolio, which would be a significant first step, but emphasised the importance of the timing of any move, as outlined by Mr Bruce previously, and the need to ensure the best return possible for the Fund.

The Chair invited Cllr Goldberg, Cabinet Member for Economic Development, Social Inclusion and Sustainability, whose portfolio included responsibility for carbon reduction, to address the Committee. Cllr Goldberg discussed the risks associated with certain industries, such as the oil industry, in light of the move to incentivise the renewables industry globally, as a result of the Paris summit. Cllr Goldberg noted that many places were moving away from carbon-based energy to renewable sources and that it was therefore essential to consider the risks associated with investing in carbon-based energy companies.

In response to a question from the Committee regarding his opinion of the recommendation of the report in the context of the Committee’s fiduciary duty to act in the best interest of the Fund, John Raisin, Independent Advisor to the Fund, indicated that he was supportive of the proposals. Mr Raisin indicated that there was no evidence that the proposed index would be less efficient than the indices currently used, and would represent increased diversification in the Fund, which would help to protect the fund from the impacts of market volatility. Mr Raisin noted that there were risks associated with carbon industries in relation to global warming, but that he supported the role of active engagement with companies via forums such as the LAPFF and would not recommend wholesale disengagement for that reason.

Mr Bruce felt that it would be very helpful for Committee Members to meet with the Environment Agency Pension Fund in the next month, as they were a leader in sustainable investing and had current holdings in the MSCI World Low Carbon Index Fund. In relation to the specific points covered in the petition by Friends of the Earth relating to coal and tar sands, research to date suggested that the MSCI World Low Carbon Index met the objective of having no exposure to coal and had very limited exposure to tar sands, and would therefore go a long way towards achieving the aims of the petition.

RESOLVED

That an implementation plan to switch one third of passive equities into the MSCI Low Carbon Target Index be developed for the next Committee meeting.