Agenda item

The Committee considered a report of the Director of Corporate Resources which provided the Committee with background information on the Leicestershire Pension Funds (Fund) 2022 Climate Risk Report (CRR) and Climate Scenario Analysis. A copy of the report marked ‘Agenda Item 8’ is filed with the minutes.

 

The Committee were joined by Alex Galbraith, Patrick O’Hara and Basyar Salleh from LGPS Central.

 

Arising from the presentation and discussion, the following points were noted:

 

 

      i.         Carbon risk metrics largely focussed on in the report were:

 

a.    Portfolio carbon intensity – each company will have a carbon intensity calculated as the carbon emissions divided by sales;

b.    Exposure to clean tech and fossil fuel reserves – which firstly looked at what exposure a company had to fossil fuel reserves, including thermal coal or coal power generation as well as clean tech, and secondly to look at the weight of the portfolio appointed by revenue;

c.     Financed emissions – the emissions of the portfolio the Fund was responsible for, for example, 1% ownership of BP, meant responsibility for 1% of their emissions.

 

     ii.         Some companies were reporting absolute emissions and were not reporting emissions net of offsets which was a problem with companies reporting statistics differently. There needed to be assurance that those offsets were robust and that they were offset emissions in perpetuity and were not a temporary offset, and to ensure those offset certificates were not being used by others to offset their emissions.

 

    iii.         From 2019 to 2022 there had been a significant decrease in the total equities carbon intensity. The change had been largely driven back in 2020 when the Leicestershire Pension Fund made the decision to switch to the LGPS Climate Multi-Factor Fund, a large contributor to the decrease in carbon emissions of total equities.

 

   iv.         The top five companies contributed around 15% of the portfolio financed emissions.

 

     v.         It was explained that financed emissions were the absolute emissions apportioned to investors based on their ownership of a company, so were for all intents and purposes the same thing.

 

   vi.         Scope Three emissions were estimated through a complicated process. For example, when looking at downstream emissions of a car manufacturer’s supply chain, there would be a lot of assumptions when trying to model emissions, as there would also be when looking at Scope Three emissions upstream for cars in use, which would be dependent on who was driving them and for how many miles. It was noted the Government was consulting on the legal requirement for local authority pension funds to include Scope Three emissions in its reporting, but there needed to be consistent methodology around the data collection and analysis.

 

  vii.         Climate Scenario Analysis tried to project short, medium and long term returns of the funds based on several scenarios and the impact is measured against a baseline of normal expected return of the fund. The rapid scenario was recognised as uncoordinated or sudden actions from governments and companies, for example, carbon tax, or mandate to use certain technologies. The orderly scenario was a more coordinated approach whereby the impact would not be seen short term with governments working together on climate change. The failed scenario was described as government and companies not doing anything at all on climate change, with long term physical impact of climate change. The key message was that orderly transition offered better long-term results and was in keeping with fiduciary responsibility to bring about the 1.5 degree outcome, with the failed transition scenario the worst outcome for investors.

 

 viii.         It was noted that some investments could be ethically questionable in other ways. It was reported that usually investments were made in private markets which were given robust due diligence and challenged as hard as possible.

 

   ix.         There was a requirement for all managers across all asset classes to integrate ESG considerations into their investment processes, so in terms of divestment there would have been a process of assessment in those companies. There was also a need for confidence in managers for disclosure and their ability to manage transition and to report to LGPS Central on a quarterly basis where decisions on investment would be scrutinised.

 

     x.         Cemex was given as an example as having improved, having met none of the criteria in only one category and achieved the criteria in four of the categories.

 

   xi.         Glencore was a further company where constructive discussions had taken place, with several improvements in their short and medium-term climate targets with an increased target reduction of 50% by 2025.

 

  xii.         In 2022 when companies issued their climate action plans to shareholders, each plan was reviewed thoroughly to assess how the plans were aligned to the 1.5degree scenario. Analysis was being undertaken by a University College Dublin, which was tracking the climate action against a company’s own pledges. Details of the professor overseeing the work would be circulated to Members following the meeting.

 

RESOLVED:

 

a)    That the Climate Risk Report be noted

 

b)    That the recommended actions and considerations set out in paragraph 42 of the report be approved for inclusion within the Fund’s Responsible Investment Plan 2023.