Investment in fossil fuels latest update with questions and answers
Cllr Robert Chapman, Chair of Pensions Committee, provides an update on how Hackney Council is further addressing concerns about the investment in fossil fuels as part of its pension fund.
There are also questions and answers below about the Hackney Pension Fund and the investment in fossil fuels.
The Pensions Committee is working to address its concerns as well as ongoing concerns from residents and campaign groups regarding the Pension Fund’s investment in fossil fuels.
At the Committee meeting yesterday (19 September), we provided an update on our progress to address these concerns and we have already made significant steps. However, the move to greener investments won’t be immediate as there are other significant responsibilities to those that have a pension, to Council tax payers, as well as considerable financial risks that need to be taken into account.
We have already invested £10m into a ‘Low Carbon Workplace’ fund, which transforms office buildings into energy efficient, low emission, workplaces with help from the Carbon Trust. Up to a further £15m worth of investments will also be put into this fund as other schemes and projects like this become available. We have also launched a review over the next few months to look at opportunities for greener investments. Work has begun to map the carbon footprint of the fund and initial results were presented at the Committee meeting yesterday. This will help us to understand the impact of the fund investments on the carbon footprint and to inform future decisions regarding how this might be managed.
The next key step is the development of a new investment strategy which will include a specific section on our approach to fossil fuel investments. The completion of this strategy also needs to take into account other factors, such as the valuation of the fund, which is currently being finalised, new regulations from the Government that sets out the legal requirements of the investment strategy, and the requirement from Central Government to move pension fund investments into eight central pools over the next few years. We expect the new strategy to be in place in early 2017.
The work on the strategy has started but the outcomes of these three central pieces of work need to be considered alongside the fossil fuel issues. We cannot make significant changes to how the fund is invested now, as it would result in significant costs which we would then have to pay twice as we move into the pooled funding arrangements. This would be irresponsible towards those whose pensions it manages as well as other stakeholders including local Council taxpayers.
We are committed to taking a very active approach to carbon risk and helping to address fossil fuel concerns, but we also have a duty to ensure investment risks and returns are balanced, with the overriding requirement to ensure that the fund can pay the benefits due to its pensioners.
The next major decisions from the Pension Committee regarding carbon risk will be made following the results of the carbon foot printing work and the completed investment strategy at the start of 2017. While this work continues, we will meet with Divest Hackney, who’s engagement we welcome, and we will continue to be open about the plans to address fossil fuel investment.
Questions and Answers
Why hasn’t the Pensions Committee made the decision to move away from fossil fuel investments at this meeting?
It was never intended that the September 19 Pensions Committee meeting would make any specific decisions regarding the way in which the Hackney Pension Fund might reduce its exposure to fossil fuel investments. The major piece of work in relation to this was the introduction of the results of the carbon footprinting work that is underway to inform the Committee fully on the overall carbon footprint of the Pension Fund. This is a major piece of work that will help to inform future decisions on the strategy.
It should also be recognised that development of the investment strategy is not focused solely on addressing this area and needs to take into account a range of other issues. These include the outcome of the fund's triennial actuarial valuation, which is currently underway, and the content of the new LGPS (Investment and Management of funds) regulations, which set out the legal framework under which the fund must invest. Whilst the guidance on this has now been issued, we still await the final regulations. These will need to be considered in full in framing the new strategy statement, which we anticipate will be considered at the pensions meeting in January 2017.
When will the fossil fuel strategy be released and will a pledge be made to move the all funds away from fossil fuel investments? If not, why not?
We anticipate that work on the strategy will be complete in early 2017 for consideration at the January meeting of the Pensions Committee. As discussed above, this will take account of work on the fund’s triennial valuation and the release of the new LGPS investment regulations. It is very unlikely that any pledge will be made to completely divest from fossil fuel investments, as such a move would place a very considerable limitation on the fund's investment options, limiting diversification and reducing flexibility. However, as agreed at the January 2016 strategy meeting that looked specifically at the fossil fuel debate, the fund is considering options for how it can reduce the risk posed by exposure to fossil fuels. The results of the fund's carbon foot printing exercise will help to inform this approach; by measuring where the greatest risks exist. The fund can then act to mitigate these, balancing its overriding fiduciary duty. Options might include target setting on some of the metrics measured or targeting particular activities.
What pledges have you made to move to greener investments and will you do more?
A series of recommendations for action were approved at the January 2016 Strategy Meeting, you can find these here.
Work on these has already begun. We have moved £10m from our existing property mandate into Threadneedle’s ‘Low Carbon Workplace’ fund, which acquires commercial office buildings and refurbishes them into energy efficient workplaces’ The Carbon Trust are a partner to the scheme, and provide support to the buildings’ occupiers to help them reduce their emissions. The Committee has approved further £15m of investments into the fund as and when projects are available for investment.
The recommendations approved at the January Committee meeting set out further plans for moving into greener investments. The fund plans to review its UK passive investments over the next few months, with a view to moving a proportion into a low carbon or similar index tracker. The fund also plans to review options for an initial active investment (of approximately 5% of the fund) in a sustainable equity mandate.
How long will this all take?
There is no specific timetable as it needs to take account of a number of other issues. A significant influence on when we can implement the recommendations from the January 2016 Committee will be the asset pooling agenda for the LGPS. Central Government requires that the 89 LGPS funds in England and Wales move their liquid assets to 8 larger asset pools over the next few years. Whilst decisions about overall asset allocation will remain with the individual funds, the responsibility for selecting specific managers will move to the pool level. As such, the Hackney Pension Fund needs to make sure that any decisions that it takes to move assets will be supported by its chosen pool, the London Collection Investment Vehicle (London CIV) – if it takes the decision now to move assets elsewhere, it will need to move them back to the CIV within a very short timeframe, a move which would incur significant additional cost. The London CIV is still new, with a limited range of strategies currently available. The range will increase over the next couple of years, so it makes sense for the fund to wait whilst working with the CIV in the meantime to ensure that it supports the strategies we need.
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 both 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 is changing, 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. To our knowledge, no Local Government pension fund has made a complete divestment pledge, although the Environment Agency Pension Fund have set an ambitious target to reduce their carbon risk. As discussed above, we feel that a complete divestment pledge would place too much restriction on the fund and its managers; however, we will consider a strategy of adopting a target to reduce our exposure.
When will the next major decisions be made and what will the Pensions Committee be doing over the coming months to address the Divest campaign?
The next major decisions will be made following the results of the carbon foot printing exercise, and in line with the development of the Fund’s overall investment strategy. As set out previously, we expect this to be complete in early 2017. The fund will continue to engage with Divest Hackney as it has done previously and we will continue to be open with the group about our plans to address carbon risk.