Agenda item

The Committee noted and commented on the Carbon foot printing presentation.

Mr Buckland introduced the session by reminding the Committee that when the revised investment strategy was agreed by the Committee in February 2020, a new formulated Responsible Investment (RI) policy was also agreed. He added that the RI Policy contained a number of key areas of focus and included a statement on Climate Change. The Fund recognises the importance of addressing the financial risks associated with Climate Change through its investment strategy, and recognises it as a financial risk.

The RI Policy also recognised the multitude of potential areas on which to focus, and therefore agreed 5 strategic priorities for the next 3 years (2020-2023).  One of these priorities was to evaluate and manage carbon exposure. Mr Buckland finished by commenting that the session today would look at the results of the carbon foot printing exercise that Mercer had undertaken on the Fund’s equity assets. Prior to presenting the results Mr Gaston would start with an educational session, designed to aid the Committee’s understanding of the results.

Mr Gaston from Mercer presented a detailed training session to help the understanding of the Committee members regarding carbon foot printing. He considered the issue of Climate Change, and global warming and noted that at present the world is on track for circa + 3?C of warming before the end of the century, and so he concluded that there needs to be more work done globally to meet the ambition of the Paris Agreement. He continued to consider the practicalities of measuring a carbon footprint, and looked at the metrics on which to focus, and addressed the issue of Scope 1, 2 and 3 emissions and how these are assessed.

Mr Gaston then moved on to consider the results of the analysis for the Clwyd Pension Fund. To start he addressed the issue of coverage across the asset classes, and noted that at the moment the analysis was limited to public equity investments, with some information available for fixed income and property investments.

To put this into context Mr Buckland reminded the Committee of the current investment strategy and noted that for the carbon footprint analysis Mercer had covered listed equity (10% Global equity, 10% Emerging Markets equity) and most of the TAA/Best Ideas portfolio. Given that the Fund is diversified and has exposure to private markets, Mr Buckland emphasised the difficulty of analysing carbon foot printing in respect of this. Mr Gaston moved on to note that when the carbon footprint was analysed at 31 March 2020 18.6% of the Fund was able to be assessed, and at 30 September 2020, due to changes in asset mix, the proportion analysed had increased to 26.5% of the Fund.

Mr Gaston focussed on the findings on the executive summary. He mentioned that the listed equity portfolio is marginally more carbon efficient than the MSCI ACWI global benchmark. There was also a reduction in carbon intensity of c9% which was partly driven by the reduction in carbon intensity in the assets now held with WPP and the transfer of passive equities with BlackRock to their ESG Equity Fund.

Mr Hibbert asked whether the carbon footprints shown in the presentation are the fund manager’s own analysis, or whether Mercer had separately analysed these. Mr Gaston confirmed that Mercer had undertaken the analysis based on the fund managers stock holdings, and an MSCI tool. This ensures that a consistent and independent assessment is used across all portfolio when comparing them.

Mr Gaston noted the following further key points:

-       The analysis split the overall fund between the listed equity managers, and the holdings within the TAA/Best Ideas portfolio.

-       Overall, the listed equity funds in the portfolio are all more efficient than the benchmark at 30 September 2020.

-       The WPP Russell Global Opportunities fund had seen its footprint improve significantly between 31 March 2020 and 30 September 2020.

-       The BlackRock ESG tracker fund had a footprint equivalent to around 60% of the benchmark index. This was in line with expectations for the Fund.

-       Within the Best Ideas portfolio there were two holdings in particular dominating the results; the LGIM Infrastructure equity fund, and the Investec Global Natural Resources fund had a significantly high carbon footprint.

It was noted that this footprint was likely to change due to a number of factors in the coming months, in particular the transfer of emerging market assets to WPP Russell.

Mr Buckland noted that the recommendations from Mercer within the presentation were being worked through with officers and will be developed into strategic objectives for agreement by the Committee at a later date.

Mr Gaston covered these “recommendations” and highlighted that the fourth recommendation is the most ambitious one where the Fund would need to consider whether they wish to adopt a strategic net zero objective.

Mr Latham recommended a very clear work programme be developed. Mr Harkin and Mr Buckland agreed that this was appropriate and would be discussed with officers before being brought back to Committee for consideration.

Mr Latham confirmed the recommendation was just that the Committee note and discuss any comments they have on the agenda item.

There was discussion about whether there was a potential clash between the Committee considering the fiduciary duty to maximise returns, and the desire to ensure that the portfolio was invested sustainably.  Mr Everett highlighted the need to ensure the Committee can continue to oversee this to be confident the fiduciary requirement is continuing to be met.  Mr Gaston agreed, and also highlighted that climate change was a systemic risk which by not taking action would impact all companies and sectors in asset allocation thereby affecting the ability to maximise returns.

            The recommendations were agreed in principle subject to the officers coming back to the Committee at a future meeting with a clear work plan and recommended objectives.

RESOLVED:

The Committee noted and commented on the Carbon foot printing presentation.