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

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Dear Orkney Islands 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 Orkney Pension Fund’s current policies on climate change risk and stranded assets (your ref: FOI 2016-0546), 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 Orkney Council has explicitly discussed the carbon bubble risk and implications of growing defaults and credit risk for fossil fuels in the pension fund, you say:

‘Our appointed invested fund manager is active in this area and has recently enhanced their Corporate Governance team with expertise in climate change, resource governance and European policy assessments. Despite retaining a clear investment focus on growth and upside opportunities, the fund manager is now better able to recognise the key themes that will arise from the transition process as we move towards a low carbon economy, including: The cost of generating energy and using fossil fuels will rise as more regulatory controls are introduced. How will this demand be satisfied and what new energy sources will replace fossil fuels; and Mitigation and adaptation strategies will present business opportunities for investors. Investment Principles recognise social, environmental and ethical considerations to be taken into consideration for investment decisions... The fund manager is regularly challenged by members of the Sub-Committee at performance reviews to justify their approach in investing and explain how they have dealt with ESG issues.’

However, I cannot find actual written documentation from the minutes of your meetings that show that the pensions committee has explicitly discussed carbon bubble risk as described above.

Please could you provide detailed written evidence - or link to minutes of meetings for example - where the pension funds specifically discuss carbon bubble risk and the implications of growing defaults and credit risk for fossil fuels.

Secondly, you mention in your response that Orkney Pension Fund manager is ‘authorised to act in the best interests of the Pension Fund when managing our portfolio of investments and dealing with social, environmental and ethical considerations’ and go on to list specific examples of fund manager activity including investments focusing on ‘resilience’ including in Kering, Naver, Praxair etc. as well as ‘opportunity’ investments in companies like Tesla Motors etc.

Please could you provide detailed information on these examples of investments that may be in line with ‘social, environmental and ethical considerations’ as you define it, or examples of ‘resilience’ and ‘opportunity’:
- How much is invested in these types of investments?
- What type of assets are they? For example bonds, shares etc
- What led to the decision to invest in these companies or investments?
- Is there specific policy in for example your Statement of Investment Principles that underpins the decision to invest in these investments?
- Do you have long-term strategy to increase these investments and if so what are the details?

Yours faithfully,
Felicity Monk

foi, Orkney Islands Council

Dear Madam

Freedom of Information (Scotland) Act 2002 – Request for Information

Thank you for your information request dated 31 October 2016 and received on 31 October 2016. Our reference is FOI 2016-0920. This is being dealt with under the Freedom of Information (Scotland) Act 2002.

We are considering your request. We 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 need 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 give you the information you are looking for at an earlier date if possible.

Kind regards

Katy Russell-Duff
Administrative Officer
Administration Support Team
Corporate Services
Orkney Islands Council, Council Offices, Kirkwall, Orkney, KW15 1NY
Telephone 01856 873535 Extension 2210

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foi, Orkney Islands Council

1 Attachment

Dear Madam

Freedom of Information (Scotland) Act 2002 – Request for Information

I refer to your email dated 31 October 2016 and received on 31 October 2016, our reference is FOI 2016-0920.

I am pleased to give the information you requested and hope that it meets your requirements.

In your response to the question of whether Orkney Council has explicitly discussed the carbon bubble risk and implications of growing defaults and credit risk for fossil fuels in the pension fund, you say:

‘Our appointed invested fund manager is active in this area and has recently enhanced their Corporate Governance team with expertise in climate change, resource governance and European policy assessments. Despite retaining a clear investment focus on growth and upside opportunities, the fund manager is now better able to recognise the key themes that will arise from the transition process as we move towards a low carbon economy, including: The cost of generating energy and using fossil fuels will rise as more regulatory controls are introduced. How will this demand be satisfied and what new energy sources will replace fossil fuels; and Mitigation and adaptation strategies will present business opportunities for investors. Investment Principles recognise social, environmental and ethical considerations to be taken into consideration for investment decisions... The fund manager is regularly challenged by members of the Sub-Committee at performance reviews to justify their approach in investing and explain how they have dealt with ESG issues.’

However, I cannot find actual written documentation from the minutes of your meetings that show that the pensions committee has explicitly discussed carbon bubble risk as described above.

Please could you provide detailed written evidence - or link to minutes of meetings for example - where the pension funds specifically discuss carbon bubble risk and the implications of growing defaults and credit risk for fossil fuels.

Individual actions or investment decisions of the Fund Manager including consideration of ESG issues are not minuted and are therefore not held.

Secondly, you mention in your response that Orkney Pension Fund manager is ‘authorised to act in the best interests of the Pension Fund when managing our portfolio of investments and dealing with social, environmental and ethical considerations’ and go on to list specific examples of fund manager activity including investments focusing on ‘resilience’ including in Kering, Naver, Praxair etc. as well as ‘opportunity’ investments in companies like Tesla Motors etc.

Please could you provide detailed information on these examples of investments that may be in line with ‘social, environmental and ethical considerations’ as you define it, or examples of ‘resilience’ and ‘opportunity’:

- How much is invested in these types of investments?

Tesla £3,931,328
Alphabet £1,121,772
(Both as at 30.09.16)

- What type of assets are they? For example bonds, shares etc Shares

- What led to the decision to invest in these companies or investments?
Primarily the prospective long term investment returns.
Transaction notes explaining the reasons for the purchase of these shares were as follows:

Alphabet (formerly Google) continues to see strong growth in its core search engine business and this is increasingly being driven by mobile devices such as tablets and smart-phones. The shift of computing from desktop to mobile opens the Google platform to a much larger audience of consumers. Indeed, the strength of Google's competitive position affords it a pivotal role in the migration of advertising dollars from traditional media to the Internet and we believe the market is underestimating the potential share of advertising which will end up on-line, given the combination of much greater ease of measuring effectiveness for the advertiser and the ever increasing amount of time being spent on-line on mobile devices. Alphabet's culture is fascinating and its ability to think long-term (e.g. YouTube, Chrome, Android) suggests there is a reasonable probability that one of the many new ventures in which the company is involved turns into a substantial revenue and profit generator in the future.

Tesla Motors is trying to rid the automotive industry of its reliance on gasoline-powered internal combustion vehicles in favour of earth-friendly electronic vehicles, and has done so without compromising on design, performance and running economy. It is a innovative disruptor chipping away at a two trillion dollar industry. We are attracted by the spirit and vision of the company and by the scale of the potential opportunity.

- Is there specific policy in for example your Statement of Investment Principles that underpins the decision to invest in these investments?
In keeping with the primary objective of the fund, the strategic asset allocation of the Fund includes a mix of asset types across a range of geographies in order to provide diversification of returns. The transaction notes above provide an explanation for the decision made, and as previously stated, ESG is delegated to the Fund Manager.
Please find attached a copy of our Statement of Investment Principles.

- Do you have long-term strategy to increase these investments and if so what are the details?
Our investment strategy is based on meeting the fund’s investment requirements, but as per our previous response we expect our fund manager to take ESG factors into account as part of their investment process. Baillie Gifford’s approach is stock driven, and their analysis takes account of environmental factors.

You have the right to request a review of the decision if you are not satisfied with the way we have handled your request. Please write to: Head of Legal Services, Council Offices, School Place, Kirkwall, Orkney, KW15 1NY or email to [Orkney Islands Council request email] to make this request. The law gives you 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, within six months of the date of the decision to a request for a review, or within six months from when we should have responded to your request for a review, whichever is the later date.

Kind regards

George Vickers
Information Governance Officer
Corporate Services
Orkney Islands Council, Council Offices, Kirkwall, Orkney, KW15 1NY
Telephone: 01856 873535 Extension: 2162
www.orkney.gov.uk

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