Agenda item

(a)          The Committee considered the analysis in light of the previously agreed net zero target by 2050;

(b)          The Committee considered and agreed each of the proposals in paragraph 1.08 of this report, specifically, targeting net zero by 2045 - a more ambitious timeline; and

(c)          The Committee agreed that the Investment Strategy Statement is updated to reflect these commitments for consultation with the Fund’s Employers.

Mr Latham started by highlighting the significance of the decisions in this report and particularly the key proposal that the Fund target net zero carbon emissions by 2045 (rather than 2050) with a 50% total portfolio carbon reduction by 2030.

Mr Latham reminded the Committee that the Fund’s key overriding objectives were to ensure there are sufficient funds to pay benefits and to assist employers in making these costs affordable. This is done by focussing on maximising investment returns, as it is the Fund’s fiduciary duty to do so. He explained, however that this could be done responsibly, without compromising that financial return, by taking into account ESG factors and other financial issues such as inflation and interest rate risk.

Mr Latham added that the Fund would need to update the Investment Strategy Statement (‘ISS’) to reflect the commitments to a net zero ambition and consult with employers regarding the proposed updates as per the regulations. Subject to agreement of the proposals in the report, the Fund would launch the employer consultation at the AJCM in November. He believed that the Fund should be looking to invest where there was a clear transition path away from carbon intensive assets and it should also be looking to manage exposure to assets that may be negatively impacted or lose value due to the low carbon transition.

            The Fund were also in discussion with the WPP over the creation of an active sustainable global equity sub-fund, but that this may take another 12 months to create.

            Mr Latham introduced Mr Gaston who would take the Committee through the analysis.

            Mr Gaston then went through a presentation explaining the proposals, highlighting the following key points:

-       The purpose of the analysis was to help set out the Fund’s net zero targets and to take a deeper dive into the listed equity portfolio to set more granular interim targets to help reduce carbon intensity.

-       It is being proposed that the Fund support limiting warming to well below 2^oC, in line with the Paris Agreement. Physical damages from warming, particularly under 3^oC and 4^oC degree scenarios, could be expected to undermine the Fund’s investment returns.

-       As an LGPS, the Fund was under scrutiny given the high level of transparency; wider stakeholders and members will want to know what the Fund is doing to mitigate climate risk.

-       Technology (such as the falling cost of renewable technologies) and market developments (such as markets rewarding sustainable companies over fossil fuel based companies) meant that low carbon transition risks and opportunities were relevant for the Fund today and into the future.

-       Page 244 outlined Mercer’s Analytics for Climate Transition (ACT) framework. The analysis showed the split of the portfolio between the grey (carbon intensive, low transition capacity companies), the green (low intensity and high transition capacity companies) and the in between (companies with a range of carbon intensities and transition potential).

-       Step 3 on page 244 showed the framework could be used to set decarbonisation targets to 2025 and 2030. Step 4 would involve setting a transition plan for implementation.

-       Page 245 covered a few of the key metrics underlying the analysis. In terms of setting targets, it is proposed that the Fund should focus on the absolute emission metric at the bottom of this slide.

-       Page 246 explained the definitions for scope 1, 2 and 3 emissions. Scope 3 emissions were not currently included in target setting due to data quality and availability issues.

The summary of Fund proposals for consideration were on page 237 and 238. The main recommendations were that the Fund targets net zero by 2045 and adopts a total Fund target of 50% carbon intensity reduction by 2030. Mr Gaston listed the remaining recommendations from page 237 and 238. For the stewardship targets, Mr Gaston explained that it is proposed that by 2025, either 70% of the Fund’s financed emissions would be covered by engagement from Robeco or include companies that are already aligned with a net zero pathway. This includes a further target to cover 90% of the Fund’s total financed emissions by 2030.

Mr Hibbert reminded Mr Gaston that at the previous meeting he had asked if a cash value on the figures set out in the report could be included, in addition to a percentage. He believed this would be easier to identify the capital being invested and shifted away from carbon intensive companies. Mr Gaston confirmed that he would be able to do this going forward.

Mr Gaston highlighted that:

-       page 249 clarified that 20% of the Fund’s holdings have been analysed for this work and this figure would increase over time.

-       page 250 illustrated that the Fund’s current equity funds were responsible for c46k tons of CO2e emissions and that a 2045 net zero target would be based on these scope 1 and 2 emissions.

-       As per the chart on the left of page 252, and according to the grey/in-between/green analysis, 94% of the Fund’s listed equities are in the in-between assets category and, 3% of the Fund’s listed equities are in explicitly green companies (for example, Tesla). 2.6% are in grey companies, which are very carbon intensive and dominated by emerging market holdings. The chart on the right of this page outlined the actual contribution to carbon intensity of these holdings.

-       page 254 identified the three different decarbonisation pathways. Responding to a question from Mrs McWilliam, Mr Gaston confirmed that the emission pathway represented by the green line was for listed equities and the emissions pathway represented by the purple line was equivalent to the total Fund decarbonisation target.

            There were a number of key recommendations for the listed equity portfolio. It was recommended to adopt a target consistent with reducing emissions by 36% by 2025 and 68% by 2030. In addition, there was a proposed target to reduce oil and gas exposures by 70% by 2025 and 90% by 2030. There were stewardship targets already described above. Lastly, it was proposed to target having 30% of the listed equity portfolio in green and sustainable companies by 2030.

            Mrs McWilliam commented that the Fund was the first in Wales to set decarbonisation targets at this level of detail as far as she was aware. However, for anything that is within the WPP asset allocations, the Fund relies on the WPP and Robeco to deliver this strategy for the Fund. This was a risk listed on the risk register, given that the Fund may not be able to achieve certain aims because the WPP may be unable to deliver everything needed. Mrs McWilliam hoped the other Funds in Wales would follow Clwyd Pension Fund’s lead by adopting their own targets for decarbonisation. Mr Latham said that the Fund was sharing their thoughts and beliefs with the WPP. As a result, the progress of the sustainable active global equity sub fund with the WPP was underway. Mrs Fielder confirmed that the Fund had analysed the engagement undertaken by Robeco on their behalf and were invited to regular meetings and updates with them in regards to responsible investing. The Fund will continue to be vocal on this matter going forward.

Mr Gaston summarised the recommendations on page 257 and 258. If the Fund were engaging with grey companies and there was no improvement over time, he believed there was the potential, in collaboration with WPP and Robeco, to introduce selective divestment. Mr Gaston emphasised the importance of communicating any agreed recommendations to the WPP and to investment managers.

Mr Latham added that some stakeholders may want to achieve net zero by, say, 2030 (rather than 2045) and asked what the impact of this would be. Mr Gaston confirmed that, taking into account the investment universe, a net zero target much earlier than 2045 would be unrealistic if the Fund still wished to maintain a diversified investment strategy. If the Fund did not maintain a diversified strategy and adopted an extremely aggressive net zero target, it would likely compromise its ability to achieve the return objectives. Mr Middleman agreed and added that if the Fund did not achieve the investment return objectives, there would be an increase in contributions for employers (all other things equal). Therefore, it is crucial to do this in an ordered and measured way with ambitious targets but also ensuring that this would not affect the financial health of the Fund.

            Mr Hibbert understood Mr Middleman and Mr Gaston’s point but asked whether it was important to keep the c£22 million of fossil fuel exposure in the listed equity portfolio (the overall Fund was worth c£2 billion) in order to maintain a diverse asset class portfolio. Mr Gaston said that the grey companies, which were carbon intensive companies, were not exclusively fossil fuel companies. He said that the Fund’s approach has been to engage with those grey companies and push them to transition to sustainable, low carbon business models. As part of the ISS, the Fund are open to selective divestment so in 5 to 10 years’ time the Fund may have minimal exposure to grey companies. Mr Latham confirmed that the Fund expected to invest in the WPP global sustainable equity fund, which was expected to have low exposure to fossil fuels and grey companies.

            Mr Hibbert commented that it was crucial here to put in the monetary value so the shift in capital is easily identified. Mr Buckland confirmed this would be done for future analysis.

Mr Latham discussed the transition of emerging market equity and added that the Fund was in the process of transitioning this to the WPP. The WPP emerging market portfolio was 25% more carbon efficient than the benchmark. Further details would be confirmed on this following the analysis next year.

Mr Gaston recapped the recommendations and the Committee were happy with the recommendations, noting that the targets would be expanded to include monetary values for information.

RESOLVED:

(a)          The Committee considered the analysis in light of the previously agreed net zero target by 2050;

(b)          The Committee considered and agreed each of the proposals in paragraph 1.08 of this report, specifically, targeting net zero by 2045 - a more ambitious timeline; and

(c)          The Committee agreed that the Investment Strategy Statement is updated to reflect these commitments for consultation with the Fund’s Employers.