Agenda item

This report updates Members on the fund’s current exposure to Carbon and any possibilities for divestment in the future and the possible risks.

Matt Hopson, Strategic Investment Manager, explained that carbon exposure was difficult to estimate for a number of reasons, including areas where many disclosures were voluntary and varied in nature from company to company. With companies that extracted fossil fuels from the ground, it was usually obvious, but where a company’s supply chain caused a significant carbon exposure or simply used a lot of power, it was less transparent. The only clear way to measure a company’s exposure to carbon was through its carbon reserves, which were the fossil fuel assets owned by individual companies.

Matt Hopson, referring to page 47 of the agenda pack, listed some of the investment risks associated with investing in companies with high fossil fuel exposure. In addition, he noted that the main area of exposure to fossil fuels remained within its equity portfolio. This was because they were easiest to measure exposure and the first assets to change in price.

He highlighted that the Sub-Committee’s key fiduciary responsibility was to manage the fund’s investments in the best interests of the beneficiary members and the Council tax payers, where the primary focus must be on generating an optimum risk adjusted return. In addition, it was vital that any investment decisions or strategies developed, such as the carbon strategy, would not negatively impact on this primary responsibility.

Kevin Humpherson explained that establishing the ‘carbon footprint’ of a given company was challenging, however there were data providers who could assist investors to better understand their portfolio’s carbon footprint by providing bespoke reports and analysis on a given investment portfolio. He also explained that if the Paris Agreement was upheld this would have a political and social impact on companies and on the use of the current carbon reserves.

The Chair asked what passive funds were offered and had been of interest. Kevin Humpherson explained that based on the global equity market index, the most reputable option was MSCI low carbon target index. This was developed to address the growing concern from investors about their investment in fossil fuels and the recent trend to reduce their exposure. In addition, the Chair asked what options had been explored by other London Local Authorities around this issue. Kevin Humpherson said that other Local Authorities were looking at the MSCI low carbon index option and some had already invested. The Council was monitoring progress and feedback would be provided at a future Sub-Committee meeting.

The Chair said that going forward the Government required The Local Government Pension Scheme members to produce an Environmental, Social and Governance (ESG) strategy by 2020 and asked Officers to ensure that this was in place. Phil Triggs, Director of Treasury and Pensions, explained that the Council had a section in their investment strategy statement around their ESG principles and these would be updated in line with any changes.

The Chair asked what risks were involved from a financial point of view going forward and how likely would other funds be significantly affected. Kevin Humpherson explained that officers would need to evaluate the fund’s total exposure to carbon and if the risk was too high the investment strategy would need to be reviewed accordingly. Furthermore, he said that Majedie and Ruffer were likely to have the highest carbon footprints compared to other funds.

The Chair asked officers if they knew the extent of the fund’s investments in carbon exposure. Kevin Humpherson said that this would be assessed and a report of the analysis would be brought to the next meeting. In addition, Councillor Matt Thorley requested that a breakdown be provided on each investment manager individually.

The Chair asked who would take the lead on the analysis and the likelihood of it being ready by the next meeting. Kevin Humpherson said that he would contact the relevant providers and request for an analysis to be completed by the end of August 2018.

Phil Triggs said that the investment strategy would also be reviewed once an analysis was completed. In addition, a representative from FTSE Russell would be invited to the next meeting.

Members of Friends of the Earth attended the meeting to discuss the Council’s intention to divest its fossil fuel exposed investments and asked when this change was likely to take place. The Chair explained that prior to the making any divestment decisions, it was vital for the Council to consider its key fiduciary responsibility – i.e. generating the best risk-adjusted-return. He said that an analysis of the fund’s total carbon exposure and the risks involved would be completed for consideration at the next meeting of the Sub-Committee.

RESOLVED

1.         That the Sub-Committee approved the approach of supplier of carbon portfolio analysis systems and bespoke reports on an investment portfolio to assist investors with carbon footprint and climate risk measurement and reporting.

2.         That the Sub-Committee noted the contents of the report and the Deloitte report attached as Appendix 1.