We are pleased to see that an item on socially responsible investment is on the agenda for the Pension Fund Committee meeting on Friday. We have read with interest the Chief Finance Officer’s report prepared to inform the discussion of this item. We are writing to offer our perspective on the issues raised in the paper and hope you will be able to consider them before the discussion at the meeting on Friday.
We welcome the report’s recognition of “a clear risk that many of the current fossil fuel reserves will become stranded assets” and the recognition that the Law Commission has stated that trustees can base investment decisions on non-financial factors, as long as there is no risk of significant financial detriment. We would like to emphasise that Fossil Free Oxfordshire:
- believes that divesting from fossil fuel companies does not necessitate a reduction in returns for the Pension Fund (please see one example of evidence at: Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment, Impax Asset Management, http://www.impaxam.com/media-centre/white-papers/beyond-fossil-fuels-investment-case-fossil-fuel-divestment),
- does not insist that the Pension Fund moves investments from fossil fuels into renewable energy sources. Many opportunities are available to redistribute these funds profitably into the rest of the economy, although we would like to remind the Committee that Lancashire County Council Pension Fund felt they could fulfil their fiduciary duty by investing £12 million in Westmill Solar Farm, Oxfordshire in 2013.
However, there are several issues to which we need to respond, raised in the context of commentators referred to in the CFO’s paper, who question “the conclusions drawn and the appropriate actions required,” despite accepting the key facts (presumably of climate change).
Para 10 and 11
This argument seems to be an excuse for changing nothing. The best possible scenario is to manage supply and demand such that an orderly transition to a new energy market can be achieved. Divesting is one contribution to influencing supply, while efficiency measures in our homes and businesses, for example, contribute to lowering demand. Both also help drive new technological developments, such as the recently announced improvements in battery technology.
As mentioned above, Fossil Free Oxfordshire is not proposing like-for-like reinvestment in renewables. However we are pleased to hear that the Committee is being briefed on the possibilities that are available. We suggest, however, that the Committee could seek some alternative views from, for example Lancashire County Council’s financial advisors or some of the expert investment managers mentioned in an article in last Saturday’s Daily Telegraph (copies will be made available at Friday’s meeting). This article also explains how fossil fuels, not only renewables, are hugely subsidised.
Para 13, 14 and 15
“The Fossil Fuel Transition Blueprint” is indeed a very useful paper that suggests key questions that investors should be raising with oil and gas company management. While it is clear that the Pension Fund takes financial return on behalf of the beneficiaries very seriously, and rightly so, it is less clear that risk is considered to the same extent. To quote from the Carbon Tracker website:
The thrust of the roadmap paper puts the onus squarely on fossil fuel management to respond properly to how growing climate regulation, advances in cleaner technology, cheaper renewables, and greater energy efficiency hit demand and the implications those global trends have for commodity prices.
“Carbon Tracker believes senior management is overly focused on demand and price scenarios that assume business as usual. As such, there may be a risk assessment ‘gap’ between a management’s view of the future and that resulting from action on climate change, technological advances and changing economic assumptions,” said Paul Spedding, an advisor to Carbon Tracker and co-author of the blueprint.
“Critically, the greatest impact will – initially – not be directly from reduced demand, but from the consequent pressure on commodity prices,” said Spedding who was previously global co-head of oil and gas research at HSBC.
We suggest that responses to these questions should, indeed, be used to decide whether a fossil fuel company still presents a low-risk investment in the long term. We are sceptical that such engagement with the industry is an adequate approach, given that 25 years of discussions with fossil fuel companies has achieved nothing close to the scale and timeframe of the changes we need. We feel the assertion that the pension fund managers have assessed the risks of their investments in line with the Carbon Tracker checklist sits oddly with the inclusion of Shell among the Pension Fund’s investments, given the company’s denial that it is exposed to carbon bubble while committing to tar sands and drilling in the Arctic.
We suggest that there would be benefit in the current investment principles for the Pension Fund being more transparent. Our understanding is that investment managers are asked to monitor and assess the social, environmental and ethical considerations, which may impact on the reputation of a particular company, with the aim of sustaining the company’s earnings and hence its merit as an investment (see Para 1). The OCC ‘Statement of Investment Principles’ states, ‘The Council’s principal concern is to invest in the best interests of the Fund’s employing bodies and beneficiaries.’ We suggest that these best interests, in line with the Law Commission’s advice, should include environmental and social factors which affect the beneficiaries, such as the effects of climate change.
The process of engagement implied by a commitment to hold fund managers to the principles in the Carbon Tracker’s transition blueprint checklist could protect the pension fund against the risk of stranded assets only if the following stringent conditions are met:
- That each of the fund managers reports on an ongoing basis on what they are doing on each specific item of the checklist for each oil company they hold and the results being achieved to date.
- That if results are not being demonstrated within a timescale commensurate with the urgency of the risk, there is a deadline for selling the stock.
We appreciate the opportunity to engage with the Pension Fund Committee and the County Council Officers on these important issues and very much hope to continue this dialogue.
We contend that the report’s characterisation of “beneficiaries’ interests” is overly narrow. As you may be aware, we have started to engage with Pension Fund members to demonstrate to the Committee that they may take a similar view.
We feel strongly that greater transparency on the questions the Pension Fund asks its asset managers, the responses it receives and the benchmarks by which the managers are assessed should be provided to beneficiaries. The challenge is to generate long-term sustainable returns in the face of a shift to a low-carbon economy which is already underway.