Agenda item

The agreed priorities of the Pension Fund Committee (Committee) in relation to the Responsible Investment (RI) policy are to set a net zero date, update the voting policy, submit an application to become a signatory of the UK Stewardship Code and align manager reporting.

Speakers:

Lloyd Whitworth, Head of Investment & Stewardship

Steve Turner, Mercer

David Crum and Thomas Bolger – Minerva (online)

Key points raised during the discussion:

1.    There was some debate about the information contained in Part 2 of the agenda and whether that could be made public.  The Chairman and Mercer stated that they would look again at the Part 2 information and determine whether any more could be made public.

2.    Mercer gave a precis of the three parts to the report as being Net Zero, Responsible Investment Policy and Voting Policy. Each part would be discussed in turn.

Net Zero

3.    Mercer highlighted that bringing the net zero date forward would mean a loss of diversification and increased risk – he gave detailed information regarding the research and analysis undertaken on this issue.

4.    A Member raised several points which included:

• Climate change posed a real material financial risk to the Surrey Pension Fund and action on climate change was necessary.
• For the Surrey Pension Fund, a 2030 net zero investment scenario would mean limiting investment into just a few companies and heavily in corporate bonds of the same companies – this was very risky and gambling with Member’s money.
• There was a fiduciary duty to make decisions on behalf of Members and the majority of Fund Members favoured a moderate United Nations Sustainable Development Goals based approach to responsible investment.
• The Surrey Pension Fund was well positioned to deliver net zero by 2050 without incurring massive transition costs and Border to Coast were focussed on delivering 2050 net zero or earlier.
• In the next 25 years many companies would have improved their position with regards to emissions and many of our current investments turning into net zero investment.  We needed to remain partners and engage with those companies to make a positive future a reality.

1.    A Member thanked officers and advisers for taking climate change seriously which was highlighted in debates, engagement reports and the massive reduction in carbon intensity of the portfolio.  However, given the progress he thought that the Mercer report was unambitious:

·         It was thought that we had moved away from the idea that fiduciary duty and responsible investment were at opposite end of a spectrum with a simple trade-off between the two.

·         The Responsible Investment Policy was consulted on with stakeholders but they were not consulted on the net zero date.

·         Throughout Surrey and Surrey itself had declared a climate emergency and set a 2030 net zero date and wanted to see a net zero date consistent with that.

·         Once a date has been set there would be an urgent need to decide how often that is reviewed because even in a few years’ time he thought the thinking would be that we could not wait for 2045/2050.

·         That a recorded vote be taken was requested.

2.    Another Member seconded the request for a recorded vote and stated that he wanted to see a net zero date of 2040 as a minimum.

Rewording of Responsible Investment Policy

3.    The Head of Investment & Stewardship introduced this section of the submitted report and stated that following consultation there was a slightly higher proportion of answers that were in neutral territory when it came to thinking about engagement with consequences and that data was reviewed independently by the team at Surrey who suggested that maybe the wording was not clear enough on that section.  There was also a request by the Committee at its last meeting to add the current exclusions by managers.  The Responsible Investment Sub Committee reviewed the suggested wording change.

4.    A Member suggested that ‘our expected outcomes’ should be more transparent as to what those expected outcomes are so that engagement with consequences could happen, and people could see those consequences being exercised.  He also stated that an example should be made of certain companies that do not engage.

5.    The Head of Investment & Stewardship referred to the priorities from the Responsible Investment Policy one of which was to engage with managers to ensure alignment and identify where there was no alignment. This was the next step, and it may be useful to have some case studies where companies have gone through the process; for example, there were 14 company exclusions with LGIM where they had gone through the process.  It was pointed out that those exclusions were not permanent, and could be revoked if positive progress is made.

Voting Policy

6.    The Head of Investment & Stewardship introduced this section of the submitted report and explained that the policy was long overdue for an update.  This was an extensive assignment and Minerva was praised for their excellent work on this.  The new policy would give a clearer picture on having sets of rules and how the Fund is voting for or against.

Further request

7.    A Member proposed that subsequent to this debate and comments made by members that the Committee commits to review the net zero date and engagement with consequences on an annual basis. Another Member requested this annual review be added to the workplan.

8.    There was a detailed discussion on how and when this request could be achieved.

9.    Minerva explained that in terms of the Responsible Investment Policy there was a section that related to Surrey’s RI policies and priority 2 made a commitment to achieving net zero in terms of investments.  Therefore, regarding the RI implementation report coming back to the committee every year it could be that Minerva provide an update in that report so then members could express an opinion as to whether they thought progress had been satisfactory or not.  The Member making the proposal stated that this would satisfy him if the report contained some commentary on changes in the investment universe.  The Chairman said he thought a full re-examination of the policy was not appropriate annually but agreed to add a review task to the on the workplan. It would then be up to the Committee to extend the work or not.

Actions/ further information to be provided:

·         To provide information on the LGIM exclusion list and whether other Surrey managers are invested in these companies, and to provide engagement case studies.

·         That the workplan be updated to include an annual review of RI progress towards Net Zero.

Resolved:

1.    That the recommendation of the Responsible Investment Sub Committee (RISC), that the Net Zero date for the Fund’s investments should be 2050 or sooner, be accepted.

(Voted for: Philip Walker, Richard Tear, Robert Hughes, Kelvin Menon, David Harmer, Trefor Hogg and Nick Harrison.  Voted against: George Potter and Steve Williams.)

2.    That the re-wording of the ‘engagement with consequences’ section of the RI policy be approved. The vote was unanimous.

3.    That the updated voting policy be approved. The vote was unanimous.

George Potter left the meeting at 13.14pm.

Subsequent to the meeting Mercer were asked to look at the information in Part 2 of their report to see what information could be made public.  An amended version of their report was circulated and included as an annex to these minutes.