Agenda item

To consider the report

To approve the statement and for the Chair to sign the declaration.

 

The Head of Finance Department highlighted that electors in Anglesey, Conwy and Gwynedd had submitted questions to the Committee relating to responsible investment. Appreciation was expressed for receiving the questions beforehand, and the presence of the electors at the meeting was appreciated. Resolved to respond to the questions before discussing the report.

 

1.    What evidence does the Gwynedd Pension Fund have that its engagement policy has genuinely changed the behaviour of the companies in which they are shareholders?

 

It was explained that, as a Fund, regular meetings were held with fund managers and progress reports were received on their engagement activities. It was noted that the fund's managers were very active and that the recent progress had been very satisfactory, with open discussions being held regarding the climate strategy of some funds. It was highlighted that the Wales Pension Partnership (WPP) had a Voting and Engagement Provider who assisted with the engagement process.

 

Reference was made to the following examples of considerate adaptations by companies within the Partnership's portfolios.

 

a)    Archer Daniels Midland (ADM). Shortcomings had been seen in ADM's policies, which contributed to continuous deforestation and a failure to protect native vegetation. It was noted that Robeco (Voting and Engagement Provider) had held discussions with ADM since 2020 and had introduced a proposal on behalf of the shareholders regarding their contribution towards deforestation and the clearing of native vegetation in South America. In March 2021, the proposal was withdrawn as the company had committed to:

 

·         set obligations and a deadline for the abolishment of deforestation by 2030

·         trace the soy supply chain in full by 2022

·         include native vegetation in their No Deforestation Policy

·         publish a protocol for engaging with suppliers

 

b)    Enel Spa. It was reported that Enel Spa (an international energy company from Italy), was active in the electricity production and distribution sectors. By leading on cooperative engagement under the Climate Action 100+ initiative, it was noted that Robeco had engaged on a number of occasions with the company's executive and non-executive managers, who had led on developing an ambitious strategy to develop renewable energy and digitalise distribution networks. As part of the efforts to strengthen the governance of companies on climate matters, Robeco succeeded to nominate the former Chief Executive Officer of Wind Power at DONG Energy to the Enel Board, along with a group of institutional investors. The next steps in their engagement discussions will seek to address the company's intention to achieve the target of net-zero by 2050, and set a long-term target for the Emissions of Scope 3

 

c)    It was reported that ING Bank (financial services provider in the Netherlands), placed a strong focus on digital services for standard banking services. It was noted, in 2018, that ING had announced a fine settlement of 775 million Euros due to their failure to discover money laundering matters between 2012 and 2016, and earlier in the year, the oversight board abolished its proposal to increase their executive pay levels following social pressures. It was highlighted that Robeco had held meetings with the Board's Chair to assess the strengths and weaknesses of ING and had contacted the Investors in an attempt to review the risk management framework. It was suggested to appoint an independent director to the Board in 2019, and to continue to focus on further independent supervision.

 

In addition, it was noted that the Gwynedd Pension Fund was working with other Local Government Pension Funds via LAPFF, which promoted the highest standards of corporate governance to protect the long-term value of local government pension funds. It was reported that the Forum was engaging directly with hundreds of companies by building a healthy relationship and holding an open dialogue about corporate responsibility in the fields of stewardship, climate risk, social risk and governance risk. It was reiterated that LAPFF acknowledged that the 'change in the climate was a substantial and urgent investment risk', and LAPFF was considered to be a very useful forum to ensure an effective impact - recent examples of engaging with Shell, Mitsubishi UFJ Financial Group and Sainsbury.

 

A further comment was made that behaving as a 'critical friend' was a way of stimulating change and engagement was considered to be the best method of seeking changes.

 

2.    Has the Gwynedd Pension Fund looked in detail at investing a proportion of the fund in local projects?

 

In response, the Cabinet Member for Finance, despite being a relatively new member of the Pensions Committee, noted that the matter of investing in local projects was one that arose regularly in meetings. It was reported that as an individual pension fund and nationally as WPP, that there was a common goal of investing locally, and nationally in Wales. Reference was made to possible opportunities being considered, along with an acceptance that more effective investment could be done in Wales.

·         renewable and community projects across Wales

·         other growth deal projects (city deals).

 

Further observations to the response:

·         that local investment was close to the Members' hearts

·         that a definition of the word 'local' was needed - need to differentiate between local and parochial. The world was smaller, links were better and so 'local' was difficult to define

·         that joining the WPP fund had strengthened the hope of local investment

 

3.    Does the Gwynedd Pension Fund consider the risk of stranded assets, considering that a recent statement from the International Energy Agency noted the need to prevent every new fossil fuel development this year?

 

In response, an explanation was given of the restrictions in an attempt to prevent global warming, along with how the economy is making the shift from energy sources such as coal, oil and gas, to using renewable energy sources with governments recommending that companies reduce carbon emissions. It was reiterated that Gwynedd Council was fully aware of these risks and with assistance from the Fund's advisers, was seeking to ensure that the asset managers, who chose the stocks, invested in companies that were diversifying their businesses towards renewable energy, so that the Fund is less open to risk. It was noted that the choice of companies that the Investment Managers invested in them was being monitored on an ongoing basis and challenged when needed by the Committee and the advisers.

 

In addition, the Members were reminded that the WPP had a Global Opportunities Fund, a de-carbonisation strategy that excluded coal, as it was considered as a stranded asset - coal was the least efficient energy source in terms of CO2, therefore, an attempt was made to avoid coal.

 

4.    Will the Gwynedd Pension Fund set a timetable for full diversification before

            the COP26 Climate Conference in November 2021

 

            It was reported that the main aim of the COP26 Conference was:

 

‘Ensuring global net zero by the middle of the century and keep within the reach of 1.5 degrees and asking countries to bring forward ambitious targets for reducing the 2030 emissions that correspond to reaching net zero by the middle of the century.’

 

            In order to achieve these extended targets, nations will need to:

·         speed-up the period for abolishing coal

·         reduce deforestation

·         speed-up the switch to electric vehicles

·         encourage investment in renewable energy.

 

It was explained, as trustees of pension funds, that it was essential to plan appropriately, and act and influence where possible, for the benefit of the environment.  It was noted that the Gwynedd Pension Fund had a duty as trustee towards all of the fund's employers, their staff and pensioners, and therefore, it did not divert for non-financial reasons alone. This meant that decision to invest or not to invest in a specific company or asset type was based on the ability to generate sustainable long-term returns for the fund, or something that would be influenced by the method that a company would adopt towards climate change.

 

It was noted that the matter regarding owning fossil fuel companies was more complex in nature that direct disinvestment. Whilst dis-investing in fossil fuel reduced the attention on the pension fund, disinvestment in itself did not address global carbon problems. Some considered that fossil fuel would continue as an essential component of the energy mix, by supporting economic growth and future global income. For example, reference was made to their use in the production and installation of wind turbines - disposing of fossil fuel companies would likely dispose of the best energy companies that invested in the generation of renewable energy. These are the companies who support and set a direction and drive the energy transformation programme. It was noted that engagement was a more effective way of encouraging change, rather than complete disinvestment as it allowed asset owners, such as the Gwynedd Pension Fund and the WPP to undertake its executive ownership and maintain a long-term relationship on such matters.

 

The Fund will challenge the investment managers regularly on the steps they take on environmental, social and governance matters, and seek to divert from fossil fuel in general as part of the general strategy to reduce carbon emissions across all sectors. It was reiterated that the Fund was developing its longer term strategy for reducing carbon emissions that is consistent with the expected requirements of the Task Force for Climate-Related Disclosures (TCFD).

 

Reference was made to the steps already taken to reduce carbon emissions:

 

·         Black Rock's Low Carbon Fund (12% of Gwynedd's Fund) - a further low carbon fund has been developed which screens fossil fuel before optimising low carbon, and therefore reduces carbon emissions further by 44% (Pensions Committee decision, 14/10/2020)

·         Global Growth Fund (17% of Gwynedd's Fund) - efforts by investment managers within the fund to reduce the carbon footprint. Baillie Gifford have developed a fund that dis-invests from fossil fuel extractor companies and fossil fuel service providers (Pensions Committee decision, 21/01/2021) and Pzena have decided to sell stocks in a company that contributed 35% (31/12/20) of carbon emissions in this specific fund.

·         Global Opportunities Fund (17% of the Gwynedd Fund) - WPP has actioned a de-carbonisation overlay by Russell Investments, which reduces the carbon footprint by 25%. It will be possible to implement the same overlay at the next transfer to the WPP emerging markets fund (3% of the Gwynedd fund) in October 2021.

·         Russell Investments (WPP Investment Management Solution Provider) - have stated that they intend to achieve a standard of net zero carbon emissions in their global investment portfolios by 2050.

·         ESG GRESB Benchmark - a global benchmark for environmental, social and governance factors within the property field. Gwynedd Fund with a 10% allocation for investments in property with relevant property managers, UBS and Black Rock have retained position number 1 and 2 in their peer group for their 'ESG GRESB' score in 2020.

·         Manager engagement - the Fund engages with managers, e.g. verifies their voting records, in an attempt to influence change in the companies in which the Fund invests, particularly WPP and Black Rock.

 

Although it was noted that Russell Investments (WPP Investment Management Solution Provider) have stated that they intend to achieve a standard of net zero carbon emissions in their global investment portfolios by 2050, the Gwynedd Fund has not committed to this statement and it is not convinced that such an ambitious and definitive target should be set.

 

It was highlighted that positive steps had been taken within the Fund regarding matters relating to climate and that they had considered the options seriously. It was accepted that more could be done, but positive steps have already been taken with an intention to continue as appropriate, by weighing things up carefully. It was reiterated that the Ffordd Gwynedd principles were being actioned, which encourages a change in mindset to seek the best result.

 

Gratitude was expressed for the questions and for their contribution to the Committee. Gratitude was expressed for the update to the statement - by planning appropriately, it will be possible to take timely steps when investing responsibly which will, consequently, influence environmental benefits.

 

RESOLVED to approve the statement and for the Chair to sign the statement.