Update - moving toward a fossil free Hackney Pension Fund
Following yesterday's Pensions Committee meeting (29 March), Councillor Robert Chapman, Chair of Hackney's Pensions Committee, provides an update about the ongoing work to make the Hackney Pension Fund ultimately fossil free.
There are also questions and answers below about the Hackney Pension Fund and the investment in fossil fuels.
I want to give a recap, in light of ongoing concern from residents and campaign groups, about how we are working to make our Pension Fund ultimately fossil free.
As part of our new Investment Strategy, agreed at the March Pensions Committee meeting, we outlined a number of measures that will help make the Fund greener, the most ambitious being our commitment of cutting the Fund’s exposure to future CO2 emissions by 50% over the next six years. This aims to bring us in-line with the level implied by the inter-governmental Paris Agreement's 2% scenario. I am confident that our decision to set an ambitious target to reduce our exposure to carbon risk puts us absolutely at the forefront of local government pension funds in this area, having set what we consider to be a realistically achievable, whilst stretching target that is clear and measurable. I also believe that our commitment to tackle this issue is as strong as those made by other London boroughs.
We have already invested £25m into a ‘Low Carbon Workplace’ fund, which transforms office buildings into energy efficient, low emission workplaces, and we’ll be investing further into other greener schemes and projects when they become available. All of these pieces of work, which have been years in the making, balances any financial risks to the Fund to ensure that the returns on investment are not adversely impacted.
Climate change is, as I’ve said before, one of the biggest threats facing our civilisation. This in turn poses a long-term threat to the Pension Fund's investments in that fossil fuel assets will lose value and become ‘stranded’ as existing government arrangements come into force.
However, there is also a threat to the Pension Fund if we completely ‘divest’ away from fossil fuels immediately; it would stop us from putting money into a range of investments which would adversely impact on our return, undermining our duty to our council tax payers and pension fund members to invest responsibly. The law places a ‘fiduciary duty’ on us to balance these concerns.
As the world’s reliance on fossil fuels does reduce in light of the Paris Agreement, and as greener investments continue to grow with their economic value, complete divestment would then become a reality and it is our ultimate ambition to do this.
I understand the concerns about the links of the Fund to global warming and we are committed to taking a very active approach in addressing these concerns, such as by working over the last two years to measure our carbon footprint. Moreover, we will continue to work with the London CIV to look at greener investment opportunities and support other London borough’s with their green ambitions. This is while ensuring that our duty to balance investment risks and returns is met and that the Fund can pay the benefits due to its members.
We will also continue to work with Divest Hackney, other campaign groups and residents to listen and respond to any concerns that they may have. We welcome and value the engagement from all interested parties as we continue to push towards a greener Hackney Pension Fund.
Questions and Answers
Is the 50% reduction target in line with the Paris agreement’s 2°C scenario?
Yes. The Intergovernmental Panel on Climate Change (IPCC) suggests that scenarios likely to maintain warming at below 2°C are characterised by a 40 - 70% reduction in Green House Gas emissions by 2050, relative to 2010 levels, and emission levels near zero or below in 2100. The International Energy Agency’s (IEA) Transition Pathways suggest that meeting this target will require fossil fuels to halve as a proportion of primary energy demand by 2050 (reducing from 81% to 39%).
The Fund is targeting a 50% reduction over the next six years, this is measured by the Fund’s absolute exposure to future CO2 emissions rather than the carbon footprint of the companies it holds. Exposure to potential future emissions is a better measure of the risk the Fund faces from stranded assets, which makes it a better target for us to use as financial risk has to be our first consideration. The Fund plans to measure its exposure, and assess progress in-line with the Paris agreement’s 2°C scenario, on a three yearly basis to align with valuation cycles.
Why don’t you divest altogether?
As at present, we feel it would increase the overall risk to the Fund. The IEA has projected the most rational global demand response for fossil fuels in the case of the transition to a 2°C pathway; demand for coal is projected to fall immediately, while oil demand peaks by 2020 before declining. Gas demand continues to increase, albeit at reduced rates. Although the level of investment required is lower under a 2°C scenario, fossil fuels are projected to remain in use for the next four decades.
As such, clean energy technology is still a relatively small proportion of the energy sector, and offers a smaller range of suitable investment opportunities. Complete divestment in the short term (i.e. five years) would mean a greater concentration of the Fund’s assets in other sectors of the economy – some of which currently look overpriced. It would also significantly limit the range of investment products available to the Fund, which is likely to impact on its returns. Over the longer term, as fossil fuels reduce as a proportion of the economy, complete divestment may become a more realistic option.
By not fully divesting, is the Fund ignoring climate change?
No. Climate change driven by human activity poses a significant threat to the planet and the integrity of the Fund, which we take very seriously. The Fund’s primary purpose is paying pensions to its members; meeting our fiduciary duty means first and foremost considering the financial health of the Fund. We therefore consider climate change from the perspective of financial risk, and are satisfied that our policy addresses this at present. We will keep the policy under review and update it as required.
Divesting cannot prevent the emission of CO2 – it simply means that somebody else owns the assets. It can therefore help reduce climate risk for individual investors but is unlikely to impact greenhouse gas emissions.
What will help to reduce carbon emissions?
Low carbon power generation on a larger scale, and more efficient energy usage. These are sectors that the Fund has made a positive commitment to invest in, and we are exploring possible options with the London Pension Collective Investment Vehicle (CIV). At present, clean energy technology is a relatively small proportion of the energy sector but it is growing rapidly, increasing investment opportunities.
But other pension funds have divested?
We have set a clear and measurable target for reducing our fossil fuel exposure and have a realistic implementation plan in place to help achieve it – we are therefore satisfied that we are in-line with, or ahead of other London council pension funds in tackling the issues that climate change presents to us.
We can only consider the risks and benefits of divestment as they apply to the Hackney Fund – funds have different histories, and therefore different funding positions and investment strategies. The Hackney Fund has a significant allocation to equities and uses passive management for a proportion of this allocation to help reduce fees; we therefore think it's important to maintain as a wide a choice of strategies as possible. We also need to ensure that we can meet the Government’s requirements to pool assets with other London funds, maintaining a degree of flexibility helps us to do this.
If you are pooling assets with the rest of London, how can you achieve the target anyway?
Prior to setting the target, we carefully considered what action we could take within a
pooled structure to help reduce the financial risks of climate change. Firstly, the Fund will still make decisions about its investment strategy; therefore, where it is financially appropriate to do so, the Fund can choose to invest in strategies through the pool that may help to reduce its risk. Secondly, pooling assets could give London funds much greater influence when it comes to engaging with Fund Managers and investee companies. As part of the CIV structure we, and similar minded councils, are working to make sure that an appropriate range of investment vehicles will be available within the pool.
Will you work together with (and learn from) funds that are divesting?
Yes. We are already working with Waltham Forest and Southwark to help ensure that suitable strategies are available through the London CIV. We still need to ensure that any strategy we use is financially appropriate for the Hackney Fund, but we believe it’s essential for funds to work together on this to maximise our impact and help make new strategies available at a reasonable cost.