Agenda item

Report of the Chief Operating Officer to consider the draft Investment Strategy Statement prepared for the fund.  The Investment Strategy Statement is a new statutory document for LGPS funds, as required by Regulation 7 of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.

The Chair agreed to vary the order of the agenda to take the report on the draft Investment Strategy Statement next.

The Committee considered the report on the draft Investment Strategy Statement, as introduced by John Raisin, Independent Advisor to the Fund. Mr Raisin gave details of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (the LGPS Investment Regulations 2016) and the implications of these for the Fund. The Committee noted that the new regulations now promoted an Environmental, Social and Governance (ESG) approach, and as an example, Mr Raisin advised of a local authority who had chosen to invest 1% of their fund in a social impact fund.

The Committee asked about the social impact fund investment referred to by Mr Raisin, and whether this investment was only in projects local to that authority. Mr Raisin advised that the projects were not local to the authority, as there would be difficulty in identifying local projects on which you could be sufficiently confident in the returns to justify investment on financial grounds. It was noted that there was nothing to restrict a local authority from making social impact investments on a local level if these were demonstrably prudent on financial grounds, but it would be a challenge to identify suitable investments and would require very high levels of due diligence and consideration in order to ensure that such investment was prudent. The Committee expressed an interest in speaking to other authorities where social impact investments had been made for projects such as social housing, in order to learn more about these possibilities.

Steve Turner, Mercer, advised the Committee that, in line with the new regulations, the Fund’s Investment Strategy Statement was now required to include details of risks to the Fund, and was also required to have a statement on the approach to asset pooling.

The Chair advised that a representation had been received from Friends of the Earth in respect of the wording of the draft Investment Strategy Statement and allowed Quentin Given, Friends of the Earth, to briefly address the Committee regarding the proposed amendment. Mr Given noted that Friends of the Earth welcomed the statement in the Social, Environmental and Corporate Governance Policy (section 5 of the draft strategy) that ‘The Fund believes that further reduction in exposure to fossil fuel industries will reduce risk and secure stronger returns for the fund over the long term’ and proposed the following additional text:

“We will seek to ensure all funds are in low-carbon investments – or positively invested in renewable energy or other green industries – as soon as reasonably possible.

As well as benefitting the Fund, this will encourage other councils and institutions to adopt similar approaches, and so increase momentum to reduce the devastation unrestrained climate change would cause and strengthen the move towards a sustainably prosperous world economy.”

In response to the amendment proposed by Friends of the Earth, Thomas Skeen, Head of Pensions, Mr Turner and Mr Raisin expressed concern regarding the practicality of making a commitment as proposed to moving all funds to low-carbon investments and regarding some of the wording as drafted, although in response to a question from the Chair it was confirmed that there was scope to include some wording around the Fund sharing its experience of ESG investing with other local authority pension funds. It was suggested that the wording of any proposed addition to the strategy be taken away for further consideration and professional advice outside the meeting, for discussion at a future meeting.

The Committee acknowledged the need to give further consideration to any proposed changes to the draft strategy before any changes could be formally agreed, but expressed sympathy with the aims of the proposal from Friends of the Earth and requested a report at the next meeting of the Committee and Board setting out options for giving the Committee a greater ability to divest from unethical investments and for identifying opportunities for positive social impact investing.

The Committee noted that, in order to comply with the regulations, it was necessary to adopt an Investment Strategy Statement at this meeting and therefore proposed that the draft statement as presented in the report be adopted, with work on some amended wording in relation to ESG matters to be undertaken outside the meeting and an updated strategy brought back to a future meeting for agreement. It was also agreed that a report on the Fund’s option in relation to divestment from fossil fuel and other investments considered undesirable from an ESG perspective, and on options for positive social impact investing, be brought to the next meeting of the Committee and Board for consideration.

RESOLVED

i)             That the Committee and Board note the contents of Appendix 1: a summary of the changes to the Local Government Pension Scheme investment regulations, prepared by the fund’s Independent Advisor: John Raisin Financial Services Limited.

ii)            That the Committee and Board note and approve the draft Investment Strategy Statement attached as Appendix 2 of the report.

iii)           That the Committee and Board agree to the Fund committing to becoming a signatory to the Financial Reporting Council (FRC) UK Stewardship Code.