Agenda item
Increased Allocation to Low Carbon Equities
- Meeting of Pensions Committee, Tuesday, 24th September, 2019 6.30 p.m. (Item 6.3)
- View the background to item 6.3
Minutes:
The Committee received and noted a report on the increased allocation to low carbon equities. The main points of the discussion on the report may be summarised as follows:
The Committee:
· Noted it is important to understand the approach taken to date as well which is a decarbonisation investment strategy in comparison to a disinvestment strategy;
· Noted that a decarbonisation approach allocates to companies that are lower carbon emitting, whereas disinvestment is completely excluding certain ‘carbon heavy’ sectors from the investable universe (e.g. energy and mining stocks). The approach of the Legal & General Investment Management (LGIM) Global Low Carbon Equity fund is a decarbonisation strategy; it does not seek to fully divest from fossil fuel companies. The decarbonisation approach is more effective at reducing exposure to carbon intensity as it covers the full range of stocks and sectors.
· Was advised that at the November 2018 meeting officers had presented the results of a carbon footprint analysis of the Fund’s listed equity assets. The results had highlighted that the Fund’s equity assets were in aggregate approximately 38% less carbon intensive than the Fund benchmark. Although a further deduction in the Fund’s carbon exposure could be achieved given the interest in reducing the Fund’s carbon exposure;
· Was informed that Members had in 2017 decided to make an allocation to passive Global Low Carbon Equity. An initial allocation of 15% of Fund assets was made. Whilst recently, the Committee had decided to increase the Fund’s strategic asset allocation to passive Global low Carbon equities further from 15% to 20%. This it has been estimated would reduce the Fund’s equity carbon foot print by around 10% relative to the current position;
· Noted that there is increasing pressure being placed on Pension Funds by stakeholders to ensure that Environmental, Social and Corporate Governance (ESG) factors are considered when making investment decisions. This pressure is coming from (i) lobby groups, (ii) other stakeholders, (iii) the Bank of England and (iv) the Pensions Regulator who have warned that savers face long term financial risks because trustees are failing to take climate change, responsible business practices and corporate governance into account when making investments;
· Note that a number of lobby groups have been pressuring Local Government Pension Scheme (LGPS) funds including Tower Hamlets to divest or have a plan to divest from fossil fuels on the basis that coal, oil and gas consumption are contributing heavily to climate change and global warming to which some scientists have attributed responsibility for the increase in the incidence of natural disasters such as storms, floods heatwaves in recent times;
· Noted that the Tower Hamlets approach is to reduce the carbon intensity of the Fund over time as an exclusionary approach removes the potential to positively influence companies and the Fund Investment consultant prefers such a decarbonisation approach;
· Noted that the benefits of the decarbonisation approach include (a) the portfolio will be less susceptible to increasing carbon pricing, stranded assets and/or related regulation; (b) supporting the flow of capital to a resilient low-carbon economy and may help to address the market mispricing of carbon ; (c) produces a market signal that incentivises companies to develop and invest in low carbon and clean technologies, influences policymakers and also helps to catalyse a new standard for other institutional investors;
· Considered the options (1 and 2 ) for increasing the allocation to Low Carbon equities as set out in the detailed paper prepared by Mercer the Fund actuary (Appendix A refers);
· Considered the cost and currency hedging implications of switching all existing passive global market-cap equities into Global Low Carbon equities (Option1);
As a result of discussions on the report the Committee RESOLVED to
· Agree Option 1 - the switching of all existing passive global market-cap equities into Global Low Carbon equities.
Supporting documents:
- Restricted enclosure View the reasons why document 6.3/1 is restricted
- Agenda item 7 - Increased Allocation to Low Carbon Equities (restricted), item 6.3 PDF 244 KB