Agenda item

It was agreed that the RI policy be reviewed annually for industry best practice and that the investable universe with regard to Net Zero dates be analysed annually as well. The Committee also requested an analysis of the potential impact of excluding the largest 25 fossil fuel companies from Fund investment.

Speakers:

Lloyd Whitworth, Head of Investment & Stewardship

David Crum, Minerva

Steve Turner, Mercer

Key points raised during the discussion:

1.    The Head of Investment & Stewardship introduced the report and explained the three sections to it. These had all come from previous agreed actions for the Committee. These were:

a)    The RI policy annual review

b)    A review of the investable universe in relation to potential net zero dates

c)    The potential impact on the Fund of excluding the 25 largest fossil fuel companies

Policy Review

2.    The Head of Investment & Stewardship stated that the policy holds up well against best practice so there had been very limited changes to some of the wording because the committee has now set a net zero date and we have brought in the new voting policy.

3.    Minerva considered it from their perspective and got all the different stewardship experts to look at it from an external benchmarking perspective. He agreed the policy was in good shape.

Investible Universe

4.    Mercer explained in detail the analysis done on several options for net zero dates. The result of which showed that the number of companies that were aligning to 2030 and 2040 relative to 2050 were just too small in order to be able to construct a sensible diversified investment portfolio. It was therefore agreed to continue to do an annual update.

5.    Mercer explained the analysis undertaken and the conclusion to the question: what does the market cap of available companies need to look like until we get to a point where we can perhaps have a more meaningful discussion about bringing forward the net zero date? Mercer’s current thought was that the number of companies would need to get to around what they are for the 2050 date.  It was accepted that the analysis wasn’t perfect but provided a good basis on which to provide more information.

6.    In response to a Member query about company interdependencies, Mercer explained that the analysis was purely factual based on the actual numbers of companies in the universe and the number of companies that have stated net zero dates.

7.    A Member stated that the analysis showed the number of companies that had a 2050 date was relatively small and asked if that was because they were unable to meet at 2050 date or some other reason and what could change the situation.  Mercer explained that it was a complex issue with many reasons but that it shouldn’t be underestimated the amount of work and complexity that companies needed to do to put this in place.

8.    The Committee discussed the moving trends shown in the analysis, with the view that due to movements the Fund should be looking at where the market will be, and not where it is now, when setting its own date.

9.    The Committee went on to discuss powers of incentivisation as an investor for companies to lower their targets dates.

Exclusion Exercise of 25 largest fossil fuel companies

10.  Mercer gave a detailed overview of the analysis undertaken.  The list of companies analysed was pre agreed with the committee.  Help with the analyses was sought from Border to Coast and Legal & General in order to quantify the impact on some investment and carbon metrics. Mercer looked at the impact of excluding the 25 companies from the relevant benchmarks for the equity funds, looking at the impact at the index level.

11.  Mercer went on the explain the metrics, and statistical theory.  The main headline was that the reduction in investable universe in terms of market cap for all the portfolios apart from UK was relatively modest, with the UK a bit more notable. The analysis then showed what impact exclusion of BP and Shell would have on returns versus the index, encapsulated by a system called “tracking error”.

12.  Mercer also explained that it is important to acknowledge that, if companies were excluded it could have a positive or negative effect. Acknowledging that this was a theoretical exercise to look at the impact of the investable universe, and then to think about what impact that could have on the ability to achieve expected returns and then to consider how that relates to what you need to achieve from a discount perspective. On this basis, then Mercer’s view was that it was a relatively modest impact.

13.  Members stated that the report merited further thought and discussion and wanted to see it on the agenda at a future meeting to discuss any divestment from fossil fuel and the impact of that as well as the process and cost of divestment.  It was noted that the UK as an investment universe was overweighted towards fossil fuels compared to the global economy.  It was noted that work would need to be undertaken with Managers.

14.  The Committee had a detailed discussion about when and how this was to be taken forward for further discussion as it was important to discuss practicalities as well as principles. Changes to the recommendations was muted but it was agreed that they remain as they were, with the commitment from the Chair to include this item on future agendas and as part of the subcommittee discussions.

Actions/further information to be provided:

That the issue of divestment be raised at future meetings on the subcommittee and Committee.

Resolved:

The Committee:

a)    Noted the alignment of the RI Policy to industry best practice.

b)    Noted the report by Mercer, the Fund’s investment consultant, on the investable universe in relation to potential Net Zero dates.

c)    Noted the report by Mercer on the potential impact on the Fund from excluding the largest 25 fossil fuel companies globally from the Fund’s investment universe.

d)    Noted the Fund’s current underlying exposure to the largest 25 fossil fuel companies.