Agenda item

This report presents a detailed framework setting out the practical steps to transition to net zero and to top-up the allocation to the Fund’s existing low carbon global equity mandate.

Flora Osiyemi (Head of Finance) introduced the report, which presented a detailed framework setting out the practical steps to transition to net zero and to top-up the allocation to the Fund’s existing low carbon global equity mandate.

In presenting the report the Sub Committee noted:

·                The Net Zero Transition Roadmap which had been prepared by the Funds Investment Advisors (Hymans Robertson) and had been attached as Appendix A to the report.  This set out a series of proposed steps for the Fund to consider over the short, medium and longer term in the context of setting and achieving net zero.

·                The importance of the Fund in being able to evolve its investment strategy in order to take account of the opportunities and risks presented by climate change, in relation to its responsible investment approach, alongside the progress made to date.

Kenneth Taylor (Hymans Roberston) then went on to present the key sections and principles within the Roadmap, with the Sub Committee noting:

·                The background to responsible investment and key themes/principles that would require consideration by the Fund as part of its journey towards net zero.

·                The development of a Net Zero Framework consisting of five key areas to drive forward the strategy.  These were identified as education, understanding the baseline, evaluating alignment and setting targets, planning and implementation actions and monitoring and ongoing reporting.

·                The short and medium term roadmap for each key area within the Framework along with potential targets (both long term and interim) and outline/assessment of potential equity funds.

·                The Roadmap was noted as setting out what would be required to be analysed in the next 12-18 months to develop the plan further. This included considering what metrics would be used to measure the fund’s climate footprint.

·                In terms of targets, whilst the key aim was to achieve a net-zero position, this would require consideration of a realistic timeframe combined with shorter term targets in order to inform actions moving forward towards the longer term aspiration.

·                The management and stewardship of this fund was noted as being important, including decisions around investment opportunities and funds.

·                In relation to education, the importance in developing training and a focus around responsible investment was highlighted as key as part of the first phase in delivering the Framework during 2022.

·                In terms of investment options, the London CIV already operated a number of funds which included an Environmental, Social and Governance (ESG) criteria, which could also be developed as an approach within the Framework, also taking account of the requirements established in relation to the Taskforce for Climate Related Financial Disclosures.  These disclosures would likely need to be produced in October 2023 should LGPS (Local Government Pension Scheme) funds be required to comply.

·                It was updated that the fund’s current carbon emissions would need to be determined. The London CIV had set up metrics for this, however other fund managers outside of the LCIV arrangements would also need to supply thee details. Once this was ascertained, this could then be reported back on an ongoing basis to monitor the impact in relation to the reduction in carbon emissions.

·                The timescale of achieving a Net-Zero position was then highlighted, with the Sub Committee advised that the London CIV had announced a target of reaching Net-Zero by 2040.  As part of this they had proposed interim carbon intensity targets for their fund range and broader engagement and transition targets with their net zero strategy having been attached as Appendix 2 to the report.

·                To this end, it was noted as being important to assess the feasibility of different target dates, including 2030, 2040 or 2050.  It was proposed that this work would be carried out as part of the initial delivery and development of the Framework in Q1 2022

·                The wider governance issues requiring consideration as part of the longer term delivery of the Framework, including the role and engagement of the Sub Committee and measures in place to monitor the progress of managers, challenging their investment decisions.  It was felt this should be based on regular progress reports to the Sub Committee.

·                In terms of current asset allocation, the Fund was already in the process of making an initial 3% investment from cash to BlackRock’s Low Carbon Fund which had been agreed as part of the previous year’s core equality allocation.  This was seen as a positive initial step towards the responsible investment strategy with the intention on increasing the proportion of equity holdings in ESG mandates over time.  As part of this approach and in line with the Funds net zero aspirations a growth structure review had been planned for 2022 aimed at reviewing and potentially restructuring the Fund’s developed market equity holdings in line with the agreed net zero targets.  Ahead of the formal review, however, the Sub Committee (as part of the overall Framework being developed) was being asked to consider a further increase in the allocation to the BlackRock Low Carbon Fund.  The Sub Committee were advised that this was supported by Hymans Robertson on the basis of a further 3% allocation (broadly valued at £32m) which would increase the total investment to 6% of total assets.  It was felt this would be meaningful enough to provide a positive low carbon impact ahead of the growth structure review without creating any potential issues.  In terms of meeting the 3% additional allocation, it had been proposed that this should be from outside the growth (global equities) allocation with the LGIM Global Equity mandate identified as the preferred option, for the reasons outlined within section 4.9 of the report.

The Chair thanked Kenneth Taylor for his presentation and members were then invited to ask questions, with the responses summarised below:

·                Members were keen to explore the potential to achieve the new zero target prior to 2040 with it being noted that this would need to be considered as part of the development of the Framework and range of steps developed to help to inform the longer term target.

·                In relation to the targets, it was asked whether the development of these would include an assessment of costs, advantages and disadvantages with members advised of the proposed development of a range of different models focussed at achieving the overall target.

·                Confirmation was provided that Framework would include an analysis of risks as well as different investment strategies and funds, with the Roadmap being used as the starting point for the process.

·                Members were keen to dispense of 2050 as a target and instead focus on the measures required to align with the London CIV target of 2040 or before (if possible).  It was therefore suggested that a representative of London CIV be invited to the next meeting of the Sub Committee with members having noted (as exempt information) the ESG characteristics within the existing LCIV Funds contained within Appendix D of the Roadmap.

As no further issues were raised the Chair thanked all officers for their work in preparing the Roadmap and and Sub Committee RESOLVED

(1)     To note and approve the Net Zero Road Map, as detailed within Appendix 1 of the report.

(2)     To approve a further 3% allocation (c. £32m based on June 21 valuation) in the BlackRock ACS World Low Carbon Equity Tracker Fund