Steps towards a fossil fuel free pension fund
Hackney Council’s Pensions Committee is taking further steps towards a fossil free pension fund after approving ambitious plans to cut the fund’s exposure to future CO2 emissions.
This radical move follows a review which looked at the financial risks posed to the pension fund’s fossil fuel investments in light of the Paris Agreement, a global action plan to help limit global warming.
To be included in the Committee’s new Investment Strategy, and announced at yesterday’s (24 January) Pensions Committee meeting, the commitment will reduce the fund’s exposure to fossil fuel investments, measured by future CO2 emission levels, initially by 50% over the next six years. The fund expects to move away from fossil fuel investment in the longer term.
This latest move follows a year-long piece of work to address concerns from local residents and campaign groups regarding the pension fund’s investment in fossil fuels.
Throughout the last year, significant steps towards greener investments were made including the investment of £20m, with an additional £5m planned for February, into a ‘Low Carbon Workplace’ fund, which transforms office buildings into energy efficient, low emission workplaces. Further changes to help the fund meet its ambitious target are planned for the next financial year.
Climate change is probably the greatest threat facing humankind. There is also a threat to our pension fund in that investments in fossil fuel assets become “stranded”, which means that they’ll lose their value as a result of necessary world-wide action against climate change.
The fund’s long-term ambition is to move away from fossil fuel investments, and I can foresee a time when our fund will have no fossil fuel investments. Our ambitious target to reduce the fund’s exposure to future CO2 emissions by 50% is the first step on that journey and demonstrates our commitment to taking an active approach to address fossil fuel concerns. We are the first London borough to set ourselves a clear risk reduction target within a realistic amount of time in order to make the necessary changes with the minimum of risk.
This is a significant step further forwards alongside the other work that is being undertaken to move the fund towards greener investments. However, we must ensure that any changes to how the Hackney Pension Fund is managed are taken extremely carefully. Our first responsibility is towards those whose pensions we manage as well as other stakeholders, which include local Council taxpayers. We have to ensure that the pension fund receives the best returns possible, and also comply with the various legal duties associated with managing a large pension fund.
Please find below a series of questions and answers regarding the latest update above and other related pension fund topics.
What does the initial 50% reduction mean for the pension fund? Does this mean you are divesting from fossil fuels?
It means we are reducing the extent to which the fund’s investments are exposed to fossil fuel reserves. We have had a review of the fund’s equity investments carried out which looked at the extent of the reserves ‘owned’ by the fund through its current investments, measured in terms of potential future CO2 emissions. This gave us a good indication of which are the most ‘risky’ investments from a stranded assets perspective. The Committee’s role is to make the high level, strategic decisions about which asset classes the fund invests in, so the target focuses on reducing risk across the whole fund rather than targeting individual companies.Through our active membership of the Local Authorities Pension Fund Forum we will also continue to engage with companies that we invest in regarding their own management of these risks.
Why will this commitment take six years?
Six years is a short time for a pension fund. The fund carries out a formal review of its Investment Strategy every three years (once each valuation cycle). Covering two valuation cycles gives a natural midpoint (Winter 2019/2020) to review progress and allows sufficient transition time to put new mandates in place. We also need to carry out this transition in line opportunities to transition assets across to the London CIV as suitable strategies and mandates become available.
Will the Council fully divest away from fossil fuels after the six years?
The aim of this target is to help manage the risks to which the fund is exposed. Eliminating the fund’s exposure to fossil fuel reserves would at present very significantly limit what the fund can invest in, which creates other financial risks (e.g. over-concentration in certain sectors). We are trying to strike a balance between these different risks – and this balance may shift over time, depending on technological, economic and political developments.We believe that over the long-term the world will have to considerably reduce its reliance on fossil fuels and the Paris Agreement is a major step in that direction. The target set out in the new strategy is an initial step in managing our exposure to fossil fuels, and reflects our long term ambition to move away from these investments. We will review the target over time and adjust it where appropriate.
Will those with a pension be affected by this latest move?
No, as members’ pension benefits are set out in law – we as a fund are not permitted to change them.
Why has it taken a year to get to this point?
Firstly, we wanted to understand more fully where the fund was most exposed to the risks of investing in carbon assets – we were reluctant to set ourselves a target without fully understanding the starting point. Secondly, there are a lot of other developments currently affecting Local Government pension funds – including the requirement to pool our investments across London. This has a significant impact on how we can put our plans into action as we need to consider what our Pool, the London CIV (Collective Investment Vehicle), is able to offer. Taking time to consider has allowed us to work with the CIV to make sure it is able to reflect the needs of the fund in the future.
Will you continue working with residents and the campaign groups to look at fossil fuel investments?
Yes – this is part of our overall risk management approach so we need to consider it as a long term, ongoing project. We will continue to monitor the carbon footprint of our fund and intend to be transparent and share that information with all interested parties. We will keep the policy under review.
Knowing of the damage that fossil fuels are causing to the world, why have you even got investments tied up with fossil fuel companies?
The fund’s main objective has always been to pay the pensions of its beneficiaries when they are due; the consideration of financial factors is therefore at the heart of its fiduciary duty. As set out by the Law Commission in their report ‘Fiduciary Duties of Investment Intermediaries’, non-financial factors ‘may be taken into account, apart from in certain exceptional cases, only where this would not result in significant financial detriment to the Fund’. In considering financial factors, the fund has sought to make investments offering a suitable balance between risk and return and to ensure that its investment options are sufficiently broad to allow the fund to diversify.Fossil fuels have historically been a key component of the UK and Global economy, supporting industry, utilities and transport. Failing to invest in this sector would therefore have represented a significant limitation on the fund’s investment options, leaving it open to the risks of a highly concentrated investment portfolio. Whilst awareness of climate change and the dangers of fossil fuels has been building since the 1980s, there has until recent years been no material risk to the financial position of fossil fuel companies. We recognise that this situation has changed, and that fossil fuel investment also carries risks. The need for and likelihood of policy action on fossil fuel consumption does now pose a threat to the business models of these companies, and the fund is reacting accordingly.
Will you consider moving all funds away from fossil fuel investments? Other local authorities have done it, why don’t you?
The fund does monitor the approach of other institutional investors (both LGPS and otherwise) to this issue, and believe the Hackney Pension Fund takes a very active approach to carbon risk compared to others. Only one other Local Government Pension Fund has made a complete divestment pledge, although the Environment Agency Pension Fund has set an ambitious target to reduce their carbon risk and the Hackney fund is following a very similar approach. Of necessity, all decisions regarding pension fund strategy must be made over the long term. As discussed above, we feel that at present it is not realistically possible to commit to an immediate divestment pledge. We will keep our policy under review.