Agenda item

The Committee considered a report on the outcome of the consultation on the draft Net Zero Climate Strategy and which sought approval of the revised Strategy and the associated implementation plan. A copy of the report marked ‘Agenda Item 9’ is filed with these minutes.

 

Arising from the presentation of the report, points noted were:

 

      i.         Important additions were the implementation plan which set out actions the Fund would undertake to achieve its goals, and manager questionnaire to find out what initiatives they might be part of, if they had set their own Net Zero targets and whether those targets applied to the Fund’s investments with them. The questionnaire would also ask how they measured climate risk, what data they had available, and whether they had in-house exemptions or divestment thresholds.

 

     ii.         Noted in the report was the voting and stewardship progress and highlighted a few key engagements over the quarter, such as Renault and Barclays.

 

Mr. D. Bill CC was then asked to read out his questions circulated to Members of the Committee in advance of the meeting:

 

“As officers will be aware Hinckley and Bosworth Borough Council passed a notice of motion on 22 February which included several requests to the pension fund regarding investments in fossil fuels.

 

Given Leicestershire County Council, my own local Council, Hinckley and Bosworth and others have declared their own climate emergencies I have several questions regarding the report before us today. I should say that I recognise the fiduciary responsibility placed on us as trustees to safeguard the financial interests of more than 200 employers, and 100,000 scheme members.

 

1.             How can the Fund support employers’ own commitments to environmentally and socially responsible stewardship, given the impact of the Fund’s investment in carbon intensive sectors such as fossil fuels?

 

2.             How can employers be sure that we as the Pension Fund Committee are considering climate risk as part of our fiduciary duty if we are still invested in fossil fuels by 2030?

 

3.             How is the Fund seeking assurance that its Investment Managers are appropriately considering material concerns around climate risk?

 

I am happy for the answers to these questions to be provided when the report is presented.

 

I also understand that officers will need to respond directly to Hinckley and Bosworth Borough Council, and I would ask that this Committee is also provided with a copy of that response”.

 

In response to the questions:

 

    iii.         It was noted that some local councils had their own commitments, and the Fund supported employers that had set commitments, for example, within the strategy itself it was recognised that the County Council had set its own challenging target to help the county reach net zero by 2045.

   iv.         The Fund could not make decisions for reasons other than the primary purpose to ensure pension benefits could be paid, though in many cases that duty also coincided with investments that positively contributed to the transition to net zero. The report included highlights of investments, such as the Fund’s investment in LGPS Central’s core infrastructure fund that had recently invested in UK-based battery storage and other UK-based investments supportive of energy transition, alongside other key investments.

     v.         With regards to fossil fuels, the Fund had to consider the risk as a whole across its investment portfolio, noting that if the Fund divested from fossil fuel companies, it would remove any influence the Fund had over the companies, and would do little to affect real world emissions. The Fund managed carbon intensive companies, which were not only fossil fuel companies, but also semiconductor and cement producers in a strategic way through its Stewardship Plan.

   vi.         In response to question two, the Local Pension Committee as part of its fiduciary duty followed proper advice and best practice, including data available, including short, medium and long-term consideration of the Fund’s asset allocation in multiple climate scenarios, and included assumptions on carbon pricing among others. The Fund has looked to take a strategic approach to manage climate risks and opportunities in a way that would best protect employee contribution rates. The Fund recognised the risk posed to the Fund from fossil fuel companies, which was why one of the targets in the Strategy was to reduce exposure to fossil fuel companies, which would be monitored annually, and considered alongside transition and physical risks to the Fund and its assets.

  vii.         Subject to the approval of the Strategy, the Fund would align its approach to investment decisions, investment management monitoring and build on the approach to engagement with active managers.

 viii.         In response to the third question, one of the key additions to the Strategy was how the Fund would increase its understanding of Managers approach to managing climate risk. This would build on historic consideration of ESG factors that had always played a part in manager selection, where no manager was appointed unless they showed evidence that those considerations were an integral part of the investment making decision process.

   ix.         Managers would continue to be invited to quarterly meeting where they could present on any factors, including climate risk to the Committee.

     x.         Any concerns or factors the Fund must take into account would be considered as part of the annual climate risk reports on strategic asset allocation, as well as any relevant decision making.

 

Arising from discussions the following points arose:

 

   xi.         The Strategy had been consulted upon, which including engagement employers, scheme members, Local Pension Board and other interested parties.

  xii.         A member acknowledged that progress had been made, and a lot of work had gone into developing the strategy. However, the Member raised concern over potential legal action if the Fund did not take appropriate action in managing climate risk. It was added that there needed to be clearer trigger points for when explicit action would be taken in the best interests of all fund members, with particular concern that young fund members might be put at a disadvantage by the lack of climate action taken. In response to the reference made to the threat of litigation, it was appreciated that the threat of legal action or claims made against any public body for failing to act reasonably could never be eliminated, but a paper brought to a previous meeting of the Committee had reflected on the current state of the law and statutory guidance to be applied and on predominant objectives of the Fund.

 xiii.         A Member raised concern with the Strategy having no interim milestone targets up to 2030 as markers to see how the fund was performing in terms of maintaining progress towards the Paris agreement alignment 2050, though it was recognised the Strategy would be regularly reviewed, and as required given specific scrutiny.

xiv.         The Member voiced further concern over companies who were proficient at making them seem more environmentally friendly than they were in reality, and would have liked to see more climate performance-based criteria in the Strategy to assess commitment to alignment with the Paris agreement goals to strengthen the Strategy.

  xv.         There was further concern and reassurance was sought on a clear and timely pathway from some of the major fossil fuel polluters such as BP and Shell, who were redoubling their efforts to extract fossil fuel, and who were failing to invest in renewable energy generation.

xvi.         Members were happy with the amount of consultation that had been undertaken on the draft and final version of the Strategy.

 

Members were asked to note that with regards to interim targets and measurements, progress would be monitored every year, which would show if the Fund was on the right trajectory in terms of exposure to fossil fuels and climate solutions, as it had been since 2019. Also, with regards to the point made about carbon companies proficient at greenwashing, the current benchmarks of Climate Action 100+ and best practice available to Central would be used to monitor the performance of companies.

 

The Chairman moved that the amended NZCS be approved. It was seconded, and on being put to the vote was approved by the majority of Members.

 

RESOLVED:

 

That:

a)    The outcome of the public consultation on the draft Net Zero Climate Strategy (NZCS) be noted;

 

b)    The amended NZCS be approved;

 

c)    Subject to b) above, the associated implementation plan and manager questionnaire be approved;

 

d)     It be noted that the Director of Corporate Resources may use his existing delegated authority to make minor amendments to the Strategy and associated documents in order to ensure the documents remain fit for purpose;

 

e)    The update on the Responsible Investment Plan 2023, including update on voting and engagement, be noted;

 

f)      It be noted that the Director of Corporate Resources, following consultation with the Chairman, will respond to Hinckley and Bosworth Borough Council’s motion calling for the Fund to divest from fossil fuel companies by 2030.

 

The meeting broke for a short break of five minutes at 11.16am.

 

Cllr. Adam Clarke left the meeting at this point.