Agenda item

The Committee considered a report of the Director of Corporate Resources, the purpose of which was to provide the Committee with an update on progress versus the Responsible Investment (RI) Plan 2024, and the Fund’s quarterly voting report and stewardship activities. A copy of the report marked ‘Agenda Item 11’ is filed with these minutes.

The Chairman welcomed to the meeting Mr. Patrick O’Hara and Mr. Sameed Afzal from LGPS Central, who supplemented the report with a presentation. A copy of the presentation slides is filed with these minutes.

Arising from discussion and questions, the following points were made:

i.          Members questioned what levels of engagement took place with fund managers, and whether these were formal, recorded and minuted discussions available for viewing. LGPS Central advised that information was contained in stewardship reports, but meetings were often covered by the Chatham House Rule to encourage open discussion. Minutes or notes were not therefore made public, though the minutes of Annual General Meetings (AGMs) were.

ii.          In response to a Member’s question on the level of engagement, LGPS Central reported it had over 3,000 holdings, and that it voted at all AGMs. However, at the beginning of the year it undertook a prioritisation process for engagement which was risk based, with one criterion being how much of a holding LGPS Central had in the company in terms of the portfolio, resulting in around 50 priority engagements. Through partnership engagement on LGPS Central’s behalf, such as EOS and Climate Action 100+, it was thought engagement would cover the first thousand holdings. It was further expected that managers across fixed income and active equities would have stewardship programmes, providing quarterly updates.

iii.          Timescales for resolving issues identified varied.  An example given was the use of slave labour which it would be expected would be resolved quickly by managers, whereas addressing climate change was harder but managers would still be expected to set targets that played out over time. LGPS Central reported that it was in the process of introducing reporting similar to climate risk monitoring, but focussed on other ESG risks, such as, pollution, modern slavery, and child labour, running portfolios through that methodology which would feed into engagement prioritisation with companies. LGPS Central’s engagement tracker was used to gauge success and outcomes through a focussed approach with companies

iv.          Members noted that it was difficult to bring a case on the grounds of climate performance as a court would have to accept this was an appropriate method for influencing company behaviour which would be difficult in the absence of being able to demonstrate a direct financial loss. However, there had been some success, for example, the Netherlands had influenced the strategy of Shell, and in the case of a Brazilian company whose shareholders brought a class action against BP as they were able to point to financial loss and share price.

v.          Members were reassured that underlying managers with LGPS Central had decided to divest from some companies that did not meet ESG standards of its sustainability mandates, despite engagement. An example of this being a company with a good sustainability story through successful energy efficient air conditioning units, but which also had an arm of business that was producing weapons.

vi.          Members noted that before investing in external managers a deep dive would be undertaken on their ESG credentials for assurance. LGPS Central reported that a company would only be divested from when the risk to the investment had become unacceptable, and at the suggestion of Members, going public before doing so would be a useful engagement tool, whilst not delving into the realms of politics or fiduciary responsibility. It was noted that during any consideration to divest, conversations would be had with the fund manager and investment directors internally on publicity.

vii.          In response to a question on voting at AGMs, LGPS Central stated that a high level of dissent from shareholders would be around 25-30% which would usually attract media interest. For example, a vote on the CEO of Morgan Stanley had gained about 60-70% against a renumeration vote, showing shareholder concerns. It was added that some votes were not binding, as ultimately management of the company and delivery of strategy would be a matter for the chief operating officers.

viii.          Members were pleased to hear that LGPS Central was a signatory to the Stewardship Code and Principles for Responsible Investment, having scored 5 stars out of 6 areas in its most recent report demonstrating commitment to responsible investment, noting that responsible investment teams across asset management businesses tended not to compete with each other but worked collaboratively.

ix.          A Member questioned a statistic under climate change that the investment strategy over all was based on assumptions 1% to 10% of investments would be impacted by 2100 by climate change. Members were advised that some estimates stated 2% of global financial assets would be at risk of the impacts of climate change by 2100, but in the worst-case scenario could rise to 10% which would be a warming of four to five degrees as opposed to the aimed for 1.5 degree Paris aligned low carbon economy. It was noted a lot of investors were engaging with companies aligned to the goals of the Paris agreement, however, all companies were exposed to climate change. The figures related to the impact to global financial assets would be checked.

RESOLVED:

(a)  That the progress versus the Responsible Investment (RI) Plan 2024 and the Fund’s quarterly voting report attached as Appendices A and B respectively to the report be noted.

(b)  That the presentation now delivered by LGPS Central and the slides attached as Appendix C to the report be noted and welcomed.

(c)   That LGPS Central be requested to provide clarity on the estimated figures presented to the Committee regarding the percentage of global assets that would be at risk of the effects of climate change by 2100.

(d)  That the Director of Corporate Resources be requested to consider how best to disseminate information contained in LGPS Central’s presentation to Fund members for information.