Agenda item

This report presents an update on progress against the Fund’s net zero transition roadmap.

Kameel Kapitan (Investment Consultant, Hymans Robertson LLP) introduced the report providing the Sub-Committee with an update on progress against the Fund’s net zero transition roadmap, as detailed within the progress update included as Appendix 1 to the report.

In recognising the focus on Responsible Investment, in particular related to climate risk, the Fund had agreed to evolve its investment strategy in order to take account of the associated opportunities and risks with progress identified in relation to:

·                Dedicated training sessions on Responsible Investment (RI) for officers and member;

·                Introduction of RI focussed investment beliefs;

·                Investment in a new low carbon mandate and a new infrastructure fund with a significant allocation to renewables; and

·                An updated Investment Strategy Statement to reference carbon goals.

Reference was also made to the agreement made at the previous Sub Committee meeting in October 21 to develop a practical “roadmap” to net zero for the Fund based on the following key principles:

·                A background to RI and key themes/principles that would require due consideration by the Fund as part of the net-zero journey;

·                Developing a Net Zero Framework in the form of 5 key areas to drive forward the Fund’s strategy;

·                A short and medium term roadmap for each key area within the framework;

·                Potential targets (both long term and interim) for further consideration and an initial list of equity funds.

The key issues noted within the progress update provided for the Sub Committee were therefore as follows:

·                The progress achieved against the short term roadmap (12 -18 months) agreed at the previous Sub Committee.

·                The key challenges facing the Fund as a result of the approach towards decarbonisation.  These included the need to recognise the difficulties in decarbonising a portfolio invested globally across diverse sectors whilst also continuing to focus on the primary obligation to support the payment of benefits to members.  In addition there would be a need to ensure a balanced approach in order to ensure the transition was fair and achieved in a timely manner, without damage to prosperity or standards of living across the world.  The switch to a low carbon portfolio over the short term would also not necessarily support a global transition to net zero.

·                The challenging nature involved in measuring climate risk effectively, particularly in private markets with a need identified to capture opportunities as well as risks and also recognise the constructive impact of engagement as opposed to just divestment as an approach given the more robust investment solutions now available.

·                The strategic context in relation to the Fund’s current carbon emissions and levers available in the form of capital allocation supported by ongoing engagement.  In this strategic context members were advised that equities were currently the largest contributor to the Fund’s carbon emissions with low carbon alternatives already identified as part of the growth assets review and the winding down of carbon intensive legacy investments and their replacement by more impact focussed funds offered through LCIV as a net zero partner of the Council.  As a result work was ongoing to review the Fund’s existing mandates within the context of the net zero strategy alongside the development of a series of short, medium and longer term targets for carbon emissions and programme of engagement with Fund Managers.

·                The development of a three dimensional framework to support the Fund’s climate ambitions, which alongside seeking to take advantage of relevant investment and engagement opportunities also included the establishment of a range of carbon metrics for monitoring and planning purposes.  The Sub Committee were therefore being asked to consider adopting a proposed range of metrics based on those published by LCIV and linked to the requirements established by the Climate Task Force for Public Disclosure.  Whilst recognising that the quality of underlying data to support these type of metrics was still evolving the Sub Committee was advised that the current asset coverage for the Fund was good with it possible to report on the metrics identified for 88% of assets.  This would continue to be reviewed and refined as the range and quality of data developed with the need also highlighted to ensure the incorporation of a range of forward looking metrics as the roadmap and strategy was developed.

·                Having noted the initial climate risk analysis provided for the Fund as part of the Investment Update report and challenges in terms of the current lack of widespread reporting of scope 3 emissions the report then moved on to present a range of options (for future consideration) in terms of the setting of an appropriate net zero target date for the Fund.

The Chair thanked Kameel Kapitan and Kenneth Taylor (Hymans Robertson LLP) for their presentation and members were then invited to ask questions, with the responses summarised below:

·                Support was expressed for the recommended focus on not only the challenges and risks but also opportunities within the development of the roadmap and RI strategy.

·                In seeking to clarify the risks in being able to meet the obligations of the Fund in terms of returns for members as part of any move towards net zero and decarbonisation of the Fund’s investment portfolio, members advised they were keen to ensure these considerations were included as part of future quarterly performance updates alongside the carbon metrics reporting.  Members were advised that this was being built into the actuarial assumptions with the Net Zero transition strategy planned to meet the Fund’s obligations albeit in a more environmentally friendly way.

·                Whilst recognising the challenges involved, members were keen to ensure as much focus as possible in engaging with Fund Managers and companies in order to obtain and push for the provision of data relating to scope 3 emissions.  Although the scope and reliability of this type of data was currently limited the Sub Committee were advised it would not prevent further engagement to encourage its development and availability on a more widespread basis in view of the increased focussed around Responsible Investment related to climate risk.

·                The suggested inclusion of planned obsolescence for products as an additional potential metric for consideration given the focus on how this policy was being operated by many large scale global companies, particularly across the tech sector.

·                The need, as part of the overall approach and challenges identified in relation to the roadmap to recognise and consider the potential impact of the worldwide increase in price of fossil fuels.  It was noted that the increase in prices around the world, as well as the ongoing impact of the conflict in Ukraine, showed the importance of greener and renewable energy in mitigating against the reliance on individual countries and companies for energy.

·                Members preference, whilst recognising the challenges identified, to secure as early a net zero transition date as possible.  In terms of the options identified members were, at this stage keen to disregard 2050 as an option and to quantify the practical risks associated with 2030.  Whilst advised that 2040 would present less significant challenges than other options identified it was noted that no final decision was being sought at this stage on the target date given the need for further work to review and quantify the impact on the Fund.

As no further issues were raised the Sub Committee again welcomed the update provided and RESOLVED

(1)       To note the update on progress on the net zero road map as outlined in Appendix 1 of the report.

(2)       To agree to the climate metrics set out in Appendix 1 of the report and to recommended expansion of further climate metrics to include forward looking metrics as part of the continued and ongoing development of the roadmap.