Questions from Caz Dennett, South West Action on Pensions (SWAP)
Dorset Council’s C&EE Strategy outlines how the Council will deliver a realistic and achievable approach to ensuring a carbon-neutral Dorset by 2040, with the aim to reduce the bulk of its carbon emissions before this date. It states to achieve this there will be a need for “imaginative and innovative solutions”. The draft strategy makes no mention of accounting for the carbon emissions produced by Dorset Pension Fund’s fossil fuel investments (currently 7.3% of the pension pot).
Question 1: When will Dorset Council include the carbon emissions from fossil fuel investments made by Dorset Pension Fund in its calculated carbon footprint, to ensure an accurate and truthful measure?
Response: Responsibility for all matters relating to the administration of the Local Government Pension Scheme (LGPS) in Dorset is delegated to the Pension Fund Committee which comprises five Dorset Council councillors, three BCP Council councillors and one scheme member representative nominated by the trades unions. We believe that it is more informative to consider the carbon emissions consequences of the pension fund’s investments separately from those of the Council.
Question 2: Can Dorset Council imagine divesting the Pension Fund from fossil fuels and adopt this as a solution that helps achieve a net zero-carbon Dorset?
Response: A review of the pension fund’s investment strategy has just concluded and will be considered later on the agenda of this meeting. This review has considered how the pension fund’s investment strategy can help the transition towards a low carbon future whilst still ensuring there are sufficient assets to pay pensions as they fall due.
Questions from Len Herbert on behalf of Extinction Rebellion
Extinction Rebellion has three asks. The first of these is to ‘Tell the Truth’ about the climate and ecological emergency by communicating the urgency for change. This includes that policies and actions are communicated widely and openly to allow for stakeholder and public engagement.
When South West Action on Pensions (SWAP) formed to cover the Brunel Pension Partnership area, attempts were made to compare divestment progress between the partners. It is striking that Dorset is the partner with the least, easily available, information. Many of the others allow an understanding of the overarching policy, the relative amounts invested in high and low carbon funds, the target carbon intensity decrease and the monitoring process.
The Annual Report 2018-19 contains only brief references (in the Appendix p.153 ) to engagement with companies on climate risks. The Investment Strategy Statement (March 2018) makes no reference to climate. The section on ‘Responsible Investment’ on the Pension Fund website dates back to 2015.
Some information can be gleaned from the minutes of Sep 2019 and March 2020 in the responses to public participation questions and the reported presentations and discussions. It is clear that the committee is indeed beginning to engage with the climate emergency issues but that the communication has some way to catch up.
One piece of information that has proved particularly elusive is the amount invested in the fossil fuel industry through the Dorset County Pension Fund. In September 2019 Medact suggested that that the figure was £141 Million. The Vice-Chair asked officers to check this figure ‘as it was necessary to have an agreed baseline to inform future discussions’. A resolution was made to this effect. In March, in response to Extinction Rebellion questions, the figure ‘was not recognised’ but a renewed resolution was made ‘to confirm the current value of investments in the fossil fuel industry by the next meeting at the latest’. Further conversations have failed to elicit this figure.
Question 1: Can we expect the communication shortcomings highlighted above to be rectified in the November Annual Report (2019-20) and the Investment Strategy Statement and to see the website updated?
Response: There is a review of the investment strategy on the agenda for today’s meeting. Following this review the Investment Strategy Statement will then be amended accordingly and the updated version published on the pension fund’s website. We will also review the content of the Pension Fund Annual Report 2019-20 prior to publication, and all other documents on the website to ensure they reflect the most up-to-date information.
Question 2: Can we finally see the baseline figure for the Pension Fund’s exposure to fossil fuel investments?
Response: As at 31 March 2020, the pension fund had direct ownership of assets valued at £6.6m in companies in the oil and gas sector. In addition, the pension fund owns units in a number of pooled funds which have underlying holdings in companies in the oil and gas sector, with Dorset’s ‘share’ of this indirect exposure estimated to be a further £53m. In total, therefore, £60m of the pension fund’s assets are invested in the oil and gas sector, 2.2% of total assets.
As at 31 March 2020, the pension fund had direct ownership of assets valued at £7.3m in companies in the ‘mining’ or ‘basic materials’ sector but this covers mining for all materials such as precious metals and minerals as well as coal. In addition the pension fund owns units in a number of pooled funds which have underlying holdings in companies in the mining sector, with Dorset’s ‘share’ of this exposure estimated to be a further £60m. In total, therefore, £67m of the pension fund’s assets are invested in the mining sector, of which we estimate approximately one third relates to fossil fuels, c. £25m or 0.9% of total assets.
Questions from Val Potter, Dorchester Churches Together Ecology Group
We understand from the minutes of the Pension Committee meeting on March 12th that discussion is at present mainly around the pursuit of a policy of engagement with fossil fuel companies rather than a clear divestment policy. A distinction is made between ‘good’ and ‘bad’ companies and the phrase ‘engagement with teeth’ is used.
We would like to be clear where the committee draw the line. For instance: a fortnight ago Storebrand, a Nordic fund worth £70 billion, dumped its stocks in a string of the world’s biggest extraction companies. Storebrand decided that the fact that these companies were using their lobbying power to block climate policies had crossed their line. They decided that spending large sums undermining action related to ‘the greatest threat facing humanity’ is ‘simply unacceptable’.
Question: Given your argument that you are using “engagement with teeth” when dealing with fossil fuel companies, have you, at any point, divested from a fossil fuel company or made a decision to divest? What actions would it take on the part of a fossil fuel company to prompt a decision to divest and how quickly would it happen?
Response: The minutes quoted refer to a presentation given by Brunel Pension Partnership, the pension fund’s investment pooling manager, on their climate change policy. Brunel believe that some fossil fuel companies will be part of the transition to a low carbon economy and that it was important to distinguish between companies, such as Repsol and Shell who were looking to engage and change, and companies, such as Chevron and Exxon who, to date, were not
Brunel have provided the following summary of their approach together with some examples of engagement that directly and indirectly relate to investment in fossil fuels:
“We are glad that you share our concern for Responsible Investing and welcome engagement on the issue.
Following extensive engagement with partner funds and many of their stakeholders we, the Brunel Pension Partnership, launched our Climate Change Policyin January 2020.
Our Policy is clear that the financial system is not fit for purpose to deliver a world that limits global warming to well below 2°C, ideally not higher than 1.5°C. Our policy clearly states our commitment to support achieving Net-Zero well before the 2050 deadline.
The policy sets out a five-point plan to build a financial system which is fit for a low carbon future. This is essential as Brunel and all the Partnership funds operate within a regulatory framework – a framework very different to that in which charities, endowments or, indeed, asset owners and managers in other countries operate. It is essential we change the system, not just our portfolios.
To support making fundamental changes in our financial system, our strategy includes policy advocacy. We advocate mandatory climate disclosures, challenging fossil fuel subsides and asking for positive policy to encourage actions that assist with decarbonising our economy, including via a price on carbon and incentivising green investment.
However, we are not waiting on incentives. We already invest extensively in renewable energy as well energy efficiency, public transport, smart grid and other technologies that support transition.
It is critical that we do not just focus on the supply side – the fossil fuel companies – but also on the demand side, looking at fossil fuel consumption, and at the wider financing of projects. When it comes to climate risk, we assess the whole value chain and engage with companies to take responsibility for their product throughout its usage, not just in its manufacture. (The examples below demonstrate the breadth of our engagement.) This issue is wider than climate change, hence our Responsible Investment Policy includes Supply Chain issues as one of its core themes.
We have also been very active in seeking mandatory climate disclosure. For example, Faith Ward, Chief Responsible Investment Officer, sits on the Pensions Climate Risk Industry Group, which was established by various government departments, including the DWP and Pensions Regulator. This year, the Group launched a consultation on a new guide to climate-related financial risks for pension schemes
Our policy also identified the need to develop and decarbonise the products we offer. It is important to note that Brunel does not select companies to invest in itself. Instead, stock-specific decisions are made by the asset managers we employ. Our Partnership does, however, set the investment guidelines under which they operate. These guidelines are co-developed with all ten Brunel clients, which means we can create products that meet the requirements of pooling, most specifically on cost savings.
As background, our active portfolios have a very low exposure to fossil fuel companies, as evidenced in our Carbon Metrics Report. Standard practice is to use mainstream indices to gauge many aspects of our performance – the trajectory of these indices is well over 3°C. This is an industry-wide issue that arises from carbon not being consistently priced into assets – we know we need better solutions to make meaningful measurements. The Partnership is now working on a project to identify solutions that meet all client investment objectives, specifically long-term investment returns, in a cost-effective manner.
On the issue of divestment, Brunel supports divestment from specific fossil fuel and other carbon-intense companies if they present a material investment risk – such as due to ‘stranded assets’ – but this is based on analysis by our asset managers. Brunel expects managers to take these decisions independently.
In addition, we have committed to review this approach and, indeed, the holdings themselves, and to evaluate whether companies are taking steps to manage climate risks and to enable our overall alignment with the Paris Agreement. Brunel set out clear expectations for its asset managers and a deadline of 2022 for reviewing companies – our climate stock take is due in 2022. The criteria to evaluate companies and managers is being developed with clients. It will take into account different investment mandates and starting points, but always with reference to Paris alignment.
We chose not to use exclusion lists with our active managers. Instead, we have challenged them to think carefully and critically about the companies and other entities they invest in, and to justify their investments in those companies with higher greenhouse gas emissions. We will not issue exclusion lists because what is needed is change in the way investment managers work. Simply stating exclusions or requiring divestment from specific stocks or sectors will not compel investment managers to develop their capacity on climate change or to drive change in the companies in which they are invested. Climate then becomes a technical operational matter, not an investment priority.
However, while we will not instruct managers to exclude certain stocks, we do expect their portfolios to have materially reduced climate exposures. We also expect them to justify any climate-controversial holding. If investment managers are not able to explain their investment strategies robustly and credibly, and to lay out how they have managed climate risk, we will look to replace them.
If we find that our investment managers’ engagement with companies is ineffective – and that the companies’ trajectory is therefore not Paris-aligned – we will consider whether to remove those managers or introduce specific exclusion criteria to the companies concerned.
As we take steps to address climate change – in all its facets – we are transparent about our holdings, the climate intensity and fossil fuel exposure of our portfolios, and the outcomes of engagement. These are consistent with the expectations of the Financial Reporting Council’s 2020 Stewardship Code and Taskforce for Climate Related Financial Disclosure – indeed, in many places, we exceed them.
· Our Carbon Metrics Report gives greater detail on how we assess the carbon footprint of our portfolios
· Our Responsible Investment & Stewardship Outcomes Report analysed our performance on a range of RI issues, from climate change to tax transparency. It showed that all active portfolios had achieved more than 7% carbon intensity improvements against their benchmarks and provide case studies of our engagement outcomes
More recently, we helped to develop and launch the IIGCC Net Zero framework, the first practical framework to guide asset owners and managers seeking to become Net Zero investors. While we are pleased with this progress, we also acknowledge that both climate change policies and findings from investment data continue to evolve and, in line with this, we continue to review our own policies.
We recognise that the arguments for immediate divestment from fossil fuel companies can appear compelling. But we believe that engagement, with the threat of divestment, can be more effective at putting pressure on both companies and investment managers to bring about change. We have provided some examples of engagement that directly and indirectly relate to investment in fossil fuels.
It is important to note that the commitments made by BP, Shell and Glencore include scope 3 emissions, to one extent or another. This means that commitments we are seeing coming through are getting closer to meeting our need to cover the complete supply chain of the product e.g. the consuming, purchasing and then burning of fuel.
· In February 2020, BP announced new ambitions to be a ‘net zero company by 2050 or sooner’
· Targets include:
o Net zero across BP’s operations on an absolute basis by 2050 or sooner
o net zero on carbon in BP’s oil and gas production on an absolute basis by 2050 or sooner
o 50% cut in the carbon intensity of products BP sells by 2050 or sooner
o Installation of methane measurement at all BP’s major oil and gas processing sites by 2023
o Reduction in methane intensity of operations by 50%
o Increase in the proportion of investment into non-oil and gas businesses
· This builds on extensive positive engagement through our engagement partner, Federated Hermes and Climate Action 100+ (the largest global investor coalition on climate change)
· In 2019, we co-signed a letter to Glencore calling for support of the statement to ensure investors can legally hold Glencore to the commitments it made as part of its recent announcement
· Extensive engagement through Climate Action 100+ and our engagement provider, Federated Hermes – Glencore has agreed to review its links with trade associations to identify lobbying activities that could undermine its support for the Paris Agreement
· For the first time, this year, the company has agreed to start reporting on scope 3 emissions and will do so on an annual basis.
· It has committed to report annually on the extent to which the company’s capital expenditure and investments were in line with the goals of the Paris Agreement.
· It has also committed to publishing new, longer-term targets, based on policy and technical developments, which will be made public in the company’s 2020 Annual Report
· Shell has committed to achieving net zero emissions by 2050 or sooner. It also has the ambition to bring its net carbon footprint in line with the goals of the Paris Agreement
· Extensive engagement through our engagement provider, Federated Hermes and Climate Action 100+, enables investors to hold Shell accountable to its targets
· More detail about Shell’s commitments can be found here
· Brunel, on behalf of our Clients, co-filed a shareholder resolution formally requesting that Barclays phases out the financing of fossil fuel companies. This was the first climate change resolution to be filed at a European bank
· It asks Barclays to publicly disclose how it plans to stop the provision of financial services to energy sector companies that are not aligned with the goals of the Paris climate agreement; it also asks how Barclays aims to understand whether a borrower is meeting Paris Agreement targets
· The resolution passed in May 2020, exceeding the 20% threshold required (23.95%). This requires Barclays to consult with shareholders and publish the views received and actions taken within six months
· Barclays has committed to being a net-zero bank by 2050. It has started to set transparent targets and will be reporting progress against them from 2021. We continue to engage with Barclays and look forward to receiving more detail on its strategy and targets, as committed, later this year
· More information on the commitments made by Barclays can be found here
Engagements with asset managers on climate change
· Our extensive engagement with Blackrock, including a one-to-one meeting with Larry Fink, CEO, led to the company agreeing to prioritise sustainability through their investment and stewardship approach
· Blackrock agreed to join Climate Action 100+ and take the lead on engaging with China Steel
· Blackrock recently took a public stance against companies who are not taking appropriate action on climate risk by voting against 53 companies and putting another 191 on ‘watch’. See FT article
· Of the 53 companies it voted against, 37 were in the energy sector. Blackrock will vote against management again in 2021, should these companies not make significant progress
· More detail of Blackrock’s commitments can be found here
To read more about our position, including our view on carbon pricing and detail on why we co-filed the Barclays resolution, please see the FAQs section of the Climate Change section of our website.
We continue to develop our thinking and practices on this issue, and to engage with a wide range of Partners and stakeholders. For a few of our most recent activity on RI and ESG, .
Many thanks for making contact and expressing your concern in this area. We will continue to learn from our peers and Partners as we develop our thinking and practices.”