Agenda item

The Committee considered, discussed, and noted the TCFD and ACT reports covering periods to the end of March 2022.

            The Chair noted that TCFD and climate analytics were discussed in detail at the recent Essential Training session held on 1 February, and given the report was for noting only, requested that questions/comments be limited to clarification of information within the report and areas of understanding.

             Mr Gaston of Mercer summarised the key points of the Fund’s proposed inaugural Taskforce on Climate-Related Financial Disclosures (TCFD) Report, and the analysis from the Analytics for Climate Transition tool. He noted that the Fund’s approach to climate change was well documented in the Fund’s Investment Strategy in terms of beliefs, processes and Carbon Footprint monitoring, alongside investments in climate-aware investment solutions. There has been a consultation on TCFD reporting for the LGPS but the requirements are not yet finalised. The Fund has produced its first report a year early, with the intention to refine the approach and bring it in line with LGPS regulations once they had been made.

            With respect to the TCFD report, Mr Gaston highlighted:

-       TCFD reporting is aimed at companies, asset managers and asset owners (including pension funds). The Fund viewed this as a best practice framework encouraging proper disclosures, informing good decision making around climate change, and encouraging standardisation across the market allowing investors to identify, assess and manage the risks & opportunities.

-       The four pillars upholding the framework are Governance, Strategy, Risk Management, and Metrics and Targets. The draft report was structured on this basis.

            Mr Gaston then went on to provide a summary of these four pillars as outlined in the report.

            Mr Hibbert commented that the assessment provided did not include the Fund’s Tactical Asset Allocation (TAA). He noted that a previous assessment had shown that the Tactical portfolio had a higher carbon intensity per pound invested than most, if not all, other asset classes. Mr Hibbert asked why this allocation had been excluded from the present assessment. Mr Gaston clarified that the TAA had been included in the assessment within various metrics to the extent available, and these were noted within the appendices. Those results showed that a number of those holdings were more carbon intensive than the rest of the portfolio. The Fund had yet to set formal guidelines and targets around those holdings and this had been identified as a next step in terms of expanding the target-setting beyond the Listed Equities to the wider portfolio.

            Mr Hibbert referred to a statement on Page 37, “The Fund has a commitment to actively exercising the ownership rights attached to its investments”, and asked who was dealing with this with regards to stocks and fund managers in the TAA. Mr Gaston explained that the day-to-day engagement is delegated to the investment managers of the underlying funds making up the TAA and these managers would have responsibility to engage with the invested companies and hold them to account, as well as voting.

            Mr Hibbert asked if there is any evidence that the managers were doing this, as he did not note any reports of engagement. Given the nature of those companies’ high carbon intensity, he felt it would be important to receive these updates regularly. Mr Gaston noted that the Fund could source this information. This did not currently make up a formal part of the reporting to the Committee but the Fund would expect those managers to be undertaking best practice stewardship.

            The Fund Investment Consultant Mr Harkin added for clarity that the Fund was essentially invested in the manager’s pooled product. Because the mandate is invested in underlying pooled funds on the Mobius Life platform, investors do not have an ability to engage or vote on the Fund’s behalf.

            Mr Hibbert referred back to page 37 to the statement that “The Fund integrates ESG issues at all stages on the Fund’s investment decision making process”, noting his view that the Fund did not integrate this into the TAA. Mr Harkin clarified that the Fund’s investment was with the manager’s pooled product, and the Fund’s Officers and advisers would take it away to consider how ensure appropriate engagement with the underlying managers.  Given this was a draft version of the report, Mrs McWilliam suggested that officers and advisers take on board Mr Hibbert’s comments for consideration in the next version of the report. The Chair agreed this with Mr Hibbert who was satisfied with this action.

            Further to this point, Mr Latham commented that the training plan included a planned session on the Best Ideas TAA portfolio to give all Committee members a better idea of how it worked, which may assist their understanding of this area.

            Mr Gaston talked the Committee through the Analytics for Climate Transition report. This analysis was carried out as at 31 March 2022, with the TCFD report covering the 12 months to the same date. The Best Ideas TAA was included in this analysis where there was sufficient data available on the underlying funds. This document addressed monitoring the targets the Fund had set and understanding the transition capacity of the Fund within the listed equity, synthetic equity and listed portion of the Russell WPP Multi-Asset Credit portfolio for which there was data.

            Mr Gaston explained that the analysis was also intended to inform an updated implementation plan to understand how the Fund can expand analysis within Listed Equities, and over time, to set formal targets across the entire portfolio including the TAA.

            Mr Hibbert asked for clarification on the use of the word “meaningfully”, referring to a key finding on Page 22 that “Fossil fuel exposure has fallen meaningfully across oil, gas and coal”. Mr Gaston quoted figures included in the executive summary of the TCFD report on page 32, stating that total potential emissions from fossil fuel reserves (included coal, oil and gas) had decreased by 29% over the 12-month period. Over the same period, exposure to coal emissions reduced by 72%, and exposure to oil and gas emissions reduced by 14%.

            Mr Hibbert asked if the absolute value of the Fund attached to the exposure had also fallen. Mr Gaston explained that the exposure to companies with some exposure to fossil fuels had increased over the period, but the measure used in this analysis considered the potential emissions from fossil fuels per billion dollars invested, so referred to the exposure to fossil fuels on a normalised basis. The pound value invested in companies which had any exposure to fossil fuels had increased in the past 12 months. Mr Hibbert noted the difficulty the Fund would have in communicating this clearly if asked. Mr Gaston explained that his view was that the emissions metric used was more meaningful than the exposure to companies with any fossil fuel reserves, as some companies will have bigger exposures than others. However, both were monitored and included within the appendices.

            Mr Gaston outlined suggested key areas of focus for the Fund over the next 12 to 18 months, highlighting in particular:

-       As well the ongoing focus on decarbonisation, the Fund should also continue to focus on companies that have a focus on climate solutions, such as the recent £50million committed to Clean Energy in Wales.

-       The Fund should also consider which emissions pathways each company is aligned with, for example 1.5 degrees in line with the Paris agreement, or a higher warming 4 degree pathway etc.

-       Engagement and stewardship – the analysis has started to look at the extent to which companies producing the highest proportion of the emissions are being engaged with or are on a low carbon pathway. There is a need to consider how this marries up with stewardship efforts through the WPP (Wales Pension Partnership) and Robeco.

            Mr Hibbert asked, on the subject of engagement, whether it is clear when the Fund will take the decision to divest where engagement is not proving to be successful. Mr Gaston replied that, looking at the ISS, the Fund does leave open the potential to divest, but that this had not been used to date. The ACT analysis Mercer had undertaken on behalf of the Fund had identified the ‘grey companies’ (those companies with very high carbon intensity, showing limited transition potential at present), and had begun undertaking monitoring to identify the key stocks that were most carbon intensive with high climate change risk. A wider discussion was needed with Robeco and the WPP on how they are engaging, and if sufficient progress isn’t seen over a period of time, divestment would be a tool that should be considered. Mr Hibbert noted an announcement from British Petroleum (BP) regarding its investment in increasing extraction and refinement. He highlighted the risk that some firms wouldn’t be making changes to transition to a lower carbon approach for at least the next two years, which would be a long time to wait without the Fund having a clear path for moving to divestment.

            Mr Gaston continued to outline the Fund’s key areas of focus for the near future as outlined in the report, noting that the final key topic of biodiversity and how it interacts with climate change would be critical to the Fund meeting net zero targets over time.

            Cllr Wedlake noted his own concerns regarding the matters Mr Hibbert had raised regarding the statements within the report and the decisions underpinning likely outcomes over the next few years. Cllr Swash agreed with Cllr Wedlake’s comments. The Chair confirmed these areas would be brought back to Committee for further consideration.

RESOLVED:

The Committee considered, discussed, and noted the TCFD and ACT reports covering periods to the end of March 2022.