The Scottish Local Government Pension Scheme and its fiduciary duty to manage climate change risk

The request was successful.

Dear Fife Council,

I am contacting you with regards to research I am carrying out on behalf of UNISON, Common Weal and Friends of the Earth Scotland.

Further to Ric Lander’s FoI request regarding Fife Pension Fund’s current policies on climate change risk and stranded assets (your ref: 14497), I write to ask for further clarification on information you made available.

Ric Lander's initial FoI can be found here: https://www.whatdotheyknow.com/request/t...

In your response to the question of whether Fife Council has explicitly discussed the carbon bubble risk and implications of growing defaults and credit risk for fossil fuels in the pension fund, you mention that Fife Pension Committee ‘is fully aware of the issues around carbon and climate change.’ However, the only mention I can find to the issue of climate change is in the minutes of the meeting of the pension committee from 20th May 2016, where Hermes EOS gave a presentation on engagement activities.

Minutes of that meeting are here: http://publications.1fife.org.uk/uploadf...

Please could you provide a detailed note of what Hermes shared with the pension committee, particularly around the issue of carbon bubble risk and the implications of growing defaults and credit risk for fossil fuels, and actions agreed. And please could you provide written documentation of any other instance where climate change risk, the carbon bubble and the Pension Fund's strategy to climate change was specifically addressed by the Pension Fund.

Yours faithfully,

Felicity Monk

Fife Council

Dear Ms Monk,

FREEDOM OF INFORMATION (SCOTLAND) ACT 2002 – REQUEST FOR INFORMATION

Thank you for your information request received on 31/10/2016, our reference; FCIR:15143. This is being dealt with in terms of the Freedom of Information (Scotland) Act 2002.

We are presently assessing your request and may be in touch soon to ask for further clarification or to offer advice and assistance if we are not able to fulfil your request in its present form.

The legislation allows us up to 20 working days from the date that we receive a valid request, including any clarification we require, to make a final response. We will be in touch within 20 working days of receipt of your initial request to provide our response or to seek clarification where necessary. We hope to provide you with the information you are looking for at an earlier date where possible.

Yours sincerely,

J McCall
Information Management & Requests Team

Fife Council

Dear Ms Monk,

FREEDOM OF INFORMATION (SCOTLAND) ACT 2002 – REQUEST FOR INFORMATION

I refer to your email dated and received on 31/10/2016, our reference; FCIR:15143.

I have detailed below the information you requested and trust that it meets your requirements.

Hermes Equity Ownership Services (EOS) engages with companies on behalf of Fife Council Pension Fund on the following themes : Environmental, Social and Ethical, Governance and Strategy Risk and Communication. No specific actions have therefore been agreed by the Pension Committee.

EOS Quarterly Public Engagement Reports and Voting Reports are submitted to quarterly pension fund committee meetings. The Engagement Reports contain a summary of the stewardship activities undertaken by Hermes EOS on behalf of its clients. The reports also provide information on the steps Hermes EOS has taken to promote global best practices, improvements in public policy and collaborative work with other long-term shareholders.

In the quarter to 30 September 2016, Environmental topics featured in 9.4% of engagements : 60% of these engagements were about Climate Change.

Hermes EOS attended the Pension Fund Committee meeting in May 2016 and discussed climate change related engagements in the following sectors :

• Oil and gas
• Mining
• Utilities
• Financial Services

And its Public Policy Engagement relating to :
• The Aiming for A investor coalition
• Development of the public policy agenda following COP 21 (2015 Paris Climate Conference)

In addition, Hermes’ Public Engagement Plan contains the following on its approach to climate risk :

“Climate change brings two key risks to investors: first, the long-term physical risks from a changing climate and its resulting harm to the wider economy and secondly, the medium-term transition risk from the move to a low-carbon economy, creating new winners and losers. We will continue to focus our efforts on the risks arising in the sectors more exposed to transition risk, which include oil and gas and mining, utilities, energy-intensive industrial players and the automotive sector. We will also explore potential derivative risks from exposures at financial services players, particularly the banks.

In addition to our engagement with companies, we will explore how to further extend the geographic scope of the climate change Aiming for A investor coalition which has successfully filed shareholder resolutions at a number of UK-based companies over the last two years, support the Institutional Investors Group on Climate Change’s corporate and public policy working groups, advise the UN Environment Programme Finance Initiative on its climate change focus and support the climate programme of the Principles for Responsible Investment (PRI). We will also support the Financial Stability Board’s Task Force on Climate-related Financial Disclosures in order to drive a higher standard of climate risk reporting across all relevant exposed sectors and within financial services.”

In Hermes’ ‘Aiming for A – Stewardship in the mining sector’, the following relates to the presentation and expands on the above :

Disclosure of climate change risks
Mitigating the risks mining companies face from climate change has been a core part of our engagements with companies. We have focused on improving corporate reporting of climate risks, setting an objective relating to the disclosure of asset portfolio resilience to climate change for several of the mining companies in our engagement programme.

We have asked companies to stress-test their portfolios – analysing their assets to see how they would perform in different circumstances – using recognised greenhouse gas emissions scenarios, such as those developed by the International Energy Agency. This includes analysis of their existing portfolios, as well as the new pipeline of products over a period to at least 2035. Furthermore, they should assess the impact of changes in demand for commodities on the supply curve and develop price implications before communicating the impact of the resulting scenarios qualitatively and quantitatively and describe their response to the scenarios and the implications for strategy.

One notable example has been the publication of climate change portfolio analysis by Anglo-Australian multinational mining company BHP Billiton in 2015. It set a welcome precedent in transparency by a major company regarding preparedness for the challenges of climate change. The scenario-based analysis underpinning this publication was the result of a successful engagement by Hermes EOS in 2014. Somewhat reassuringly for investors, due to BHP Billiton’s well diversified portfolio, the work set out that even in a more extreme 2°C scenario with a cost of carbon of $80/tonne – the latest cost of carbon in the EU emissions trading scheme was €5.60/tonne on 30 June 2016 – climate change is estimated to reduce the operating margins of the company over a 20-year period by approximately only 5%. While demand for some commodities is anticipated to fall in a lower carbon economy, the company expects it to rise for others. We have used this precedent to encourage the company’s peers to carry out a similar exercise.
Shareholder resolutions.

As part of the Aiming for A coalition of investors, we filed climate change-related shareholder resolutions at oil and gas majors BP and Shell in 2015 in the belief that carefully crafted, supportive but stretching shareholder proposals can play a positive role in encouraging best practice during the transition to a low-carbon economy. Such resolutions also highlight the need to balance the short- and longer term aspects of shareholder value creation. Throughout 2015, we raised the idea of filing similar resolutions on the disclosure of asset portfolio resilience to climate change with the chairs of three major diversified mining companies, namely Anglo American, Glencore and Rio Tinto, all of which are listed in London.

Board support increases the likelihood that a resolution will be passed and ensures management will be committed to implementing the resolution. While each chair indicated his informal personal backing during the engagement, formal board support could not be guaranteed. It was necessary to demonstrate the scale of long-term institutional investor support by meeting the required thresholds for co-filing required by company law.

The shareholder resolutions we recommended our clients to co-file asked for enhanced disclosure of the companies’ approach to climate change risks, including management of operational greenhouse emissions, their strategic portfolio resilience to low-carbon scenarios, research and development into low-carbon solutions, their public policy position on climate change, as well as their overarching corporate governance framework and link to key performance indicators.

Support
In the end, we successfully met the required thresholds by bringing together over 100 supportive institutional investors for the shareholder proposal submitted at Rio Tinto and 50 for the resolution at Jersey based Glencore. We eventually also managed to pass the required 5% alternative threshold for the shareholder proposal at Anglo American. In total, investors responsible for more than $8 trillion, including clients of Hermes EOS, were involved in filing the resolutions.

At the AGMs of the respective companies, the shareholder proposals received overwhelming support, namely 99% at Glencore, 98% at Rio Tinto and 96% at Anglo-American.

Anglo American committed to finalising energy efficiency targets at its AGM, following the restructuring of the business. It also agreed to carry out further analysis of the resilience of its principal commodities to low-carbon scenarios, as well as to explore the link between remuneration and climate change-related key performance indicators.

Rio Tinto meanwhile promised to work with institutional investors to explore new ways of analysing climate change risks.

With the shareholder resolutions all passed, we are now working with the companies to help define the nature of the additional disclosure required to meet the requirements of the shareholder resolutions, which ideally should be part of the strategy section of their annual reports, and give feedback on first drafts. Glencore has already published its view of the robustness of its business to low-carbon scenarios and committed to conducting this analysis on the basis of a 2°C scenario, which is particularly important given the company’s relatively high exposure to thermal coal.

Public policy work
As part of our engagement, we collaborated with the Institutional Investors Group on Climate Change (IIGCC) to produce the document called Investor Expectations of Mining Companies – Digging deeper into carbon asset risk which outlines the approach and disclosure that investors expect of mining companies concerning climate change risks.

We are also working with the Task Force on Climate-related Financial Disclosures, set up by the chair of the Financial Stability Board, to establish guidelines for standardised risk disclosures by companies on climate change. This will help to increase the scope of reporting across more companies, as well as its comparability. It should also mean that we do not have to use the administratively cumbersome approach of using more shareholder resolutions to achieve the disclosure required by investors across the industry.

To answer your second point, climate change risk, the carbon bubble and the Pension Fund’s strategy to climate change has not been specifically addressed by the Pension Fund Committee : it appointed Hermes EOS to engage with companies on these issues on the Fund’s behalf.

I would like to draw your attention to the copyright situation in relation to the material.

The Council holds the copyright for the material provided and it may be reproduced free of charge in any format or media without requiring specific permission. This is subject to the material not being used in a derogatory manner or in a misleading context. The source of the material must be acknowledged as Fife Council and the title of the document must be included when being reproduced as part of another publication or service.

If you are not satisfied with the way we have handled your request, you have the right to request a review of the decision. Please write to: Head of Legal Services, Finance & Corporate Services, Fife House, North Street, Glenrothes, KY7 5LT or e-mail to [email address]. The law provides for you to make this request up to 60 working days from when we received your enquiry or 40 working days from when you receive this correspondence whichever is the later date. Where the outcome of the review fails to resolve the matter to your complete satisfaction you have the right to apply to the Scottish Information Commissioner for a decision.

Fife Council will consider and seek to resolve any request to the Head of Legal Services that falls outside these time scales.

Yours sincerely

J McCall
Customer Experience Co-ordinator
Information Management & Requests Team

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