Agenda item

(a)  The Committee agreed to adopt a 2050 Net Zero ambition for the Fund’s investment strategy, noting this may be updated to an earlier date following further consideration and analysis.

(b)  The Committee agreed the high level net zero work plan or roadmap as detailed in 1.07. This roadmap laid out the next steps required to set net zero target(s) underpinned by a credible implementation plan.

(c)  The Committee agreed to formally request that the Wales Pension Partnership offer an Active Sustainable Global Equity Sub-Fund and that the necessary project to construct this Sub-Fund commences as soon as possible.

            Mr Latham stated that the two key responsible investment priorities that were being considered within this item of the agenda were setting and meeting climate change objectives and identifying sustainable investment opportunities. In relation to the first of these, the Committee were being asked to agree to adopt a 2050 net zero ambition for the Fund’s investment strategy, however, Mr Latham made it clear that 2050 is the latest date that they would aim to achieve this by and hoped that further analysis would allow them to set a date earlier than 2050 and the second recommendation was for the Committee to agree the road map which included this further analysis

In relation to the second priority, Mr Latham explained that the Fund’s investment advisor believed that sustainable global equities should form a material part of the Fund’s equity portfolio. Therefore, he outlined the recommendation for the Committee to formally request the Wales Pension Partnership to offer an Active Sustainable Global Equity Sub-Fund. Given that this would need to go through the JGC and the other Funds in the WPP, the timescale for completion is expected to be approximately 12 to 24 months.

            Mr Gaston summarised the progress that the Fund had already made in relation to climate change.  He explained that a net zero target referred to achieving net zero emissions by balancing carbon emissions with carbon removal. The three key reasons for an investor to adopt a net zero target are as follows:

-       Climate change science tells us that there are c10 years left to limit and mitigate the worst effects of climate change. Currently, we are on track for 2.9 degree warming by 2100. However, the Paris Agreement aims to limit warming to well below 2 degrees. To achieve this there needs to be an overall reduction in emissions of 45% by the year 2030 (based on 2010 levels) according to the IPCC — Intergovernmental Panel on Climate Change.

-       Secondly, momentum is growing across different stakeholders, markets and technology. For example, technology developments have led to falling costs for wind and solar energy generation, and these are increasingly outcompeting fossil fuel alternatives such as coal.

-       Lastly, it is likely we will see a form of a low carbon transition from the current economic model, which is reliant on fossil fuels, to a greener version of the economy.

Mr Gaston stated that TCFD stood for The Task Force on Climate-related Financial Disclosures. This is an international framework providing a number of climate change disclosure recommendations. It is expected to form the basis of the upcoming LGPS regulations that the Fund will need to adhere to.

Mr Gaston explained that when implementing a net zero target, the Fund would need a plan that includes credible, achievable targets as well as being able to meet financial targets. There were four steps involved in creating a plan:

1.    Calculate the baseline – this includes current emissions, transition capacity and green exposures.

2.    Analyse portfolio possibilities for implementing a portfolio wide transition by asset class.

3.    Set measurable targets for reducing emissions and growing transition capacity, tested against different scenario pathways (for example a 2050 net zero target).

4.    Implement a plan, drawing on outputs from each step.

He confirmed that Mercer would provide further details for the Committee to approve after their analysis at the November Committee meeting. Once targets and implementation plans were agreed, the Fund will update its policy and going forwards this would become an annual exercise.

            Due to the Fund being c103% funded, Mr Hibbert restated the earlier question to whether this position could be used as an opportunity to achieve something now in regards of climate change by divesting from fossil fuel companies. Mr Gaston commented that the grey category in the slides represented high carbon intensive companies with low transition potential – this might include oil/gas companies as well as other high carbon companies, for example, in the steel & cement sectors. Therefore, the grey bucket did not only include fossil fuel companies. Mr Gaston added that some energy companies might be expected to transition their business models from an oil/gas focus to renewable sources of energy. Therefore, Mercer’s analysis would highlight where these companies sit in terms of transition potential and help determine how the Fund might best manage these exposures going forward. In addition, through stewardship, Robeco would hold these companies to account and ensure their business models were transitioning over time.

Mr Hibbert believed that if one extraction company made a successful amount of carbon reduction, this would not mean that all companies would do the same. Mr Gaston agreed with Mr Hibbert, but stated his view was that a detailed analysis should be undertaken before decisions on how to manage ‘grey’ companies was made. Mr Everett agreed with the spirit of Mr Hibbert’s comment but highlighted that in his view it is important that the Fund take time to have fuller information before making decisions, ensuring the consequences of such decisions are fully considered.

Mr Everett also added that he would like to learn more about the transition and implementation timing.

Cllr Thompson-Hill stated that given the complexity of this matter, he wondered how the Fund would communicate this decision to members (in particular those outside the Pensions Committee) and other stakeholders given that they may have no prior background knowledge or training. Mr Latham said that some information will be included within newsletters that are sent to members and he is also planning including an item at the annual joint consultative meeting. Mr Latham recognised the fact that a number of training sessions on RI and climate change had been held over within the last year with an aim of disseminating the complex information contained across a range of RI areas and aid the decision-making ability of the Committee. Mrs McWilliam agreed with Mr Latham and stressed the need for really clear communications around this.  She also added that if there were changes to the investment strategy, the Fund would have an obligation to consult on these changes with the appropriate stakeholders. She also reminded the Committee that they set the investment strategy for the Fund, and it is then the responsibility for WPP to deliver this on their behalf, albeit practically there may be some challenges so this long period of notice will be helpful in achieving that.

Mr Harkin confirmed that, due to the emerging market equity transition to WPP being due to take place in October 2021, the equity allocation designated for the WPP is not yet fully invested. Russell select the underlying managers who then select the specific equity positions held in the WPP Global Opportunities Fund, although Russell aim to reduce the carbon intensity of the Fund by 25% through an overlay strategy. Mr Harkin added that the best ideas portfolio is discretionary and Mercer are putting together a responsible investment framework to overlay this and help inform how the Fund makes commitments going forward. Mercer are completing this work over the summer.

            Cllr Williams asked if the majority of the c£25 million invested in fossil fuels within the Fund was directly through fund managers or via pooling. Mr Gaston confirmed that the WPP had global equity exposures of £5.6 million (out of the c£25 million of fossil fuels investments). Furthermore, between BlackRock  and the Wellington Funds (which are not in the WPP), there was around £20 million invested in fossil fuels through funds held outside WPP.  Mr Latham clarified that those mandates outside WPP will become managed by WPP as part of the October transition.

RESOLVED:

(a)  The Committee agreed to adopt a 2050 Net Zero ambition for the Fund’s investment strategy, noting this may be updated to an earlier date following further consideration and analysis.

(b)  The Committee agreed the high level net zero work plan or roadmap as detailed in 1.07. This roadmap laid out the next steps required to set net zero target(s) underpinned by a credible implementation plan.

(c)  The Committee agreed to formally request that the Wales Pension Partnership offer an Active Sustainable Global Equity Sub-Fund and that the necessary project to construct this Sub-Fund commences as soon as possible.