The Committee considered a report of Corporate Resources setting out the Responsible Investing Update. A copy of the report marked ‘Agenda Item 10’ is filed with these minutes.
Philip Pearson and Mhairi Gooch from Hymans Robertson Fund’s Investment Advisor were in attendance to present their report on engagement versus divestment and view of the Fund’s proposed Net Zero goals and metrics.
The Director of Corporate Resources set out a correction to engagement item nine within Appendix F and clarified that the target was for the Fund’s own operations to be net zero by 2030, alongside LGPS Central and investment managers. The target was expected to be easily achievable as it related to emissions arising from its office.
Arising from the discussion the following points arose:
i. The Fund delivered an annual report on delivery of the Fund’s Taskforce on Climate Financial Disclosure (TCFD). The report had been updated to reflect that the Fund had commenced reporting of climate metrics on an annual basis. The metrics would be contained within the Climate Risk Report that would be considered by the Committee in November 2022. The Committee noted that the Fund continued to work with LGPS Central to refine the metrics used.
ii. The Committee acted as quasi trustees for the Pension Fund and worked to ensure the Fund met its fiduciary duty to invest for the benefit of members and on behalf of the employers within the Fund. While there was no legal requirement for the Fund to become carbon neutral, climate change was considered as a fundamental financial risk, and therefore needed to be managed by the Fund as a risk, as with inflation.
iii. Hymans Robertson advised that engagement and divestment were both necessary tools in any effective stewardship strategy. The Committee noted the pros and cons relating to engagement and recognised divestment was a key tool where a company was not conducive to effective engagement, an immediate risk, or as part of an escalation strategy. Members recognised the importance of the tools and felt it was important that the Fund was clear about its limits of engagement within the Net Zero Climate Strategy, and the point at which it would consider divestment.
iv. Hymans Robertson further highlighted that where an oil or gas company was committed to Net Zero, had a credible plan and was prepared to be transparent within reporting processes Hymans would argue that company (if legitimate and an attractive investment) was important to retain. Though any support would stop if the company ceased its transparency and no longer had a credible plan for Net Zero.
v. The proposed target of “Net Zero 2050 or sooner” had been selected as it aligned with most sovereign nation targets and best practice, which posed an achievable but challenging target for the Fund. Officers advised that the date allowed the Fund to maintain a reasonable level of financial return while mitigating risk, allowing the Fund to balance reduction in emissions and continue to support companies through decarbonisation.
vi. Members supported the proposed targets and metrics and emphasised that the issue was a trade-off between divestment, and ensuring the Fund met its fiduciary duty. As part of that duty the Committee recognised engagement was not just about the environment but also social and governance factors, ensuring managers were investing responsibly in good, well-run companies, as that was most conducive to Leicestershire as a long-term investor.
vii. Hyman’s view of the Fund’s proposed targets was that they were generally realistic. However, advised that the ‘absolute emissions target’ was fairly ambitious given the Fund’s starting point, the fact the Fund was projected to grow, and the assumption that the world would decarbonise at the required rate, which it had yet to do. Hymans recommended more work took place on the absolute emissions target prior to finalisation of the Net Zero Climate Strategy.
viii. A Member expressed their support to the original ‘absolute emissions to be reduced by 40% from 2019 reported levels by 2030’ as expressed within the report, with a view that it was important for the Fund to strive to achieve such targets.
The Committee thanked officers for the detailed report and set out their support for the metrics and proposed engagement with scheme members and employers.
i. Approved the proposed engagement process with Employers and Scheme Members with respect to beliefs and targets for the Net Zero Climate Strategy.
ii. Noted the latest position and next steps in the creation of the Net Zero Climate Strategy, especially in respect of Hymans Robertson the Fund’s investment advisor’s feedback.
iii. Noted the Fund’s Taskforce on Climate Financial Disclosure and the quarterly voting and stewardship reports.