Agenda item

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

Sawan Shah (Senior Finance Analyst, Brent Council) introduced the report, which updated the Committee on the Fund’s net zero transition road map, Responsible Investment (RI) policy and the LGPS Consultation on Governance and reporting of climate change risks.

In considering the report the Committee were advised of the increasing pressure from various stakeholders to ensure that Environmental, Social and Governance (ESG) issues were considered in the course of managing the fund and in its investment decision making.  As a result the Fund’s investment advisors Hymans Robertson had updated the Fund’s Responsible Investment Policy (set out in Appendix 1 of the report) which formalised the Fund’s RI beliefs, principles and approach. The key updates proposed for Brent’s RI policy were as follows:

·            A further development of the Fund’s environmental, social and governance (ESG) related beliefs, setting out the actions being taken to understand and manage ESG issues for the benefit of Fund members and other stakeholders.

·            Considering the use of active management over index-tracking approaches where an active manager could be expected to provide materially improved ESG characteristics.

·            Considering opportunities to make investments with a positive social or environmental impact subject to the risk and return characteristics being acceptable.

The Committee were also informed of the steps being taken by the Fund in relation to RI, which were summarised as follows:

·            Integrating the consideration of ESG issues throughout the investment decision-making process.

·            Reviewing an investment manager’s RI policy when appointing a new investment manager or allocating money to a new fund.

·            Monitoring the Fund’s managers on an ongoing basis from an ESG perspective.

·            Asking the Fund’s investment advisers to highlight opportunities to invest in responsible investment strategies.

·            Ensuring that where an investment manager did not meet the expectations within the policy, officers would engage with the respective stakeholders to encourage improvements.

·            Continuing to review London CIV’s RI policy to ensure that its strategies and beliefs were still aligned with the Fund’s.

·            An ongoing commitment to actively exercising ownership rights attached to the Fund’s investments. Voting rights had been delegated to the investment managers with the objective of preserving and enhancing long-term shareholder value.

Regarding the net-zero transition roadmap, Kenneth Taylor (Hymans Robertson LLP) provided a more detailed overview on the progress to date, with the key points as follows:

·            A commitment of £50m in an infrastructure fund through London’s asset pool, the London CIV, with a significant renewable component agreed in 2019. This investment was currently being built up with £23.7m invested by 30th June 2022.

·            The Fund had also agreed investment in a new low carbon passive equity tracker (BlackRock ACS World Low Carbon Equity Tracker). An initial allocation of £15m had been deployed with further allocations also agreed and due to be made shortly.

·            The Fund had entered into the London CIV Private Debt fund with a £50m commitment in 2021. The underlying managers (Churchill/Pemberton) were required to show a clear commitment to integrating ESG at the fund level and the investment process as part of the evaluation criteria.  As the fund was currently being built up it was, however, noted that full investment would require a number of tears prior to it being fully invested.

·            The Fund was a member of the Local Authority Pension Fund Forum (LAPFF), a collaboration group between LGPS Funds.  Membership of LAPFF allowed the Fund, along with other local government funds, to engage with large global firms, with climate change and the transition to a low carbon economy one of the individual engagement streams that LAPFF dealt with.

·            The Fund has introduced carbon metrics reporting into quarterly performance reports providing the Weighted Average Carbon Intensity (WACI), fossil fuel exposure and carbon intensity for the majority of the Fund’s assets. The Fund would continue to review and refine metrics as the range and quality of data evolved.

·            The Fund would continue to review its growth holdings to identify options to move towards net zero with a view to presenting further recommendations to the Committee in February 2023.  As an example, it was noted that the table in section 3.17 of the agenda identified potential targets for further consideration from the London CIV and the Fund’s existing low carbon equity holding through BlackRock.  Alternative options through Legal and General, with whom the Fund’s main equity mandates were held, would also be considered.

The Committee were then notified of the LGPS Consultation on Governance and reporting of climate change risks, with members advised that:

·            The consultation was seeking views on government proposals to require administering authorities of the Local Government Pension Scheme (LGPS) to have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities.

·            It was proposed that LGPS administering authorities would calculate the carbon footprint of their assets and assess how the value of each fund’s assets or liabilities would be affected by different temperature rise scenarios, including the ambition to limit the global average temperature rise to below 2 degrees set out in the Paris Agreement.

·            Administering authorities would be required to publish a Climate Risk Report annually by 1 December. The first Climate Risk Report would be due in December 2024.

Members were advised that the consultation was due to last for 12 weeks from 1 September 2022 to 24 November 2022 with officers, in consultation with the Fund’s advisors, intending to respond on behalf of the Fund.

The Chair thanked officers and Hymans Robertson for their presentation, and members were then invited to ask questions, with the responses summarised below:

·            The Committee sought clarification on the statement “ongoing engagement is preferable to divestment”. Hymans Robertson advised the Committee that, in their view, engagement should come before divestment. It was stressed that engagement was a useful tool in moving towards net zero through influencing organisational change.  If companies did not deliver on climate targets, divestment could then be used as a sanction.  It was agreed that examples of successful engagement would be useful for future meetings with further clarification to be included as part of future reports regarding the statement, in response to the concerns expressed.

·            The Committee were informed that the models underpinning climate scenario analysis on actuarial evaluations were available and could be provided on request.

·            The Committee agreed that a future meeting with LCIV and fund managers would be useful to discuss net zero targets and low carbon investments, which officers advised they would look to progress.

·            Regarding the possibility of meeting the 2030 net zero target, the Committee were advised that whilst challenging, the Fund had the capital to invest in renewable energy and similar investments, which provided a lever despite unfavourable economic conditions.

As no further issues were raised, the Sub Committee again welcomed the update provided and RESOLVED to note and endorse the update on the net zero transition roadmap, updated Responsible Investment Policy and LGPS Consultation on Governance and reporting of climate change risks.