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

The request was successful.

To whom it may concern,

In the last year, the Governor of the Bank of England (1), HSBC (2), Mercers (3) and the World Bank (4) have made it clear that climate change is a major and growing financial issue. Mark Carney has said that climate change poses physical, liability and transition risks, which are all increasing.

Therefore, it is in the best interests of the SLGPS to have regard to the financial risks posed by climate change, and take appropriate steps to manage these risks.

We are writing to the Chair of the Pension Committee, or other appropriate Council official, to set out the response of your fund to five questions:

1. What steps is the fund taking to address the financial risks posed by climate change? Is there a formal process for regularly assessing and reducing exposure to these risks? In particular, can you provide details of:
a. When the Board or Pensions Committee has explicitly discussed carbon bubble risk and the financial implications of growing defaults and credit risk for fossil fuel companies; and
b. What action or strategy the fund has agreed upon, to manage and reduce carbon bubble risk/exposure to fund members?

2. The December 2015 Paris Agreement on climate change saw Governments agreeing to keep global warming to well below 2 degrees, which will require the overwhelming majority of the world’s proven fossil fuel reserves to remain unburned, which would lead to substantial stranding of fossil fuel assets held by corporations in which your fund may currently be investing. On April 22nd 2016, the Paris treaty was signed by 175 countries. Since December 2015 how has your pension fund changed its approach to climate change risks, given the Paris Agreement’s significant ratcheting up in the global response to climate change risks?

3. Have you surveyed or formally consulted with your individual members or employers for their views on your ESG policies or practices in the last 10 years?

4. How much does the fund spend on ESG engagement services and can you give any examples of engagement activities relating to climate change/carbon risk from the last 10 years?

5. Have you signed up to the UN Principles for Responsible investment?

We are asking these questions of all UK local authority pension funds, as part of a survey to assess whether pension funds’ fiduciary duties are being met in regard to climate change financial risks. If you would be able to respond to these questions by the end of July 2016 we would be extremely grateful. Please accept this letter as a request for information under the Environmental Information Regulations 2004, alternatively the Freedom of Information Act 2000.

Please do contact me if you would require further information.

Yours sincerely

Ric Lander
Friends of the Earth Scotland
5 Rose St, Edinburgh EH2 2PR
0131 243 2718
[email address]

Friends of the Earth Scotland is an independent registered Scottish charity (SC003442).

References

1 Mark Carney Bank of England, 2015. Breaking the tragedy of the horizon - climate change and financial stability. www.bankofengland.co.uk/publications/Pag... . 29 September

2 HSBC, April 16 2015. Stranded Assets: what next? http://www.businessgreen.com/digital_ass...

3 Mercers, 2015. Investing in a time of climate change. http://www.mercer.com/our-thinking/inves...

4 World Bank, 2015. Major Financial Institutions Move to Integrate Climate Change
http://www.worldbank.org/en/news/press-r... December 7th

foi, Orkney Islands Council

Dear Sir

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

Thank you for your information request dated 23 June 2016 and received on 23 June 2016. Our reference is FOI 2016-0546. 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.

Irene Cowdry
Administrative Assistant
Business Support Team
Corporate Services
Orkney Islands Council, Council Offices, Kirkwall, Orkney, KW15 1NY
Telephone 01856 873535 Extension 2132

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foi, Orkney Islands Council

Dear Sir

 

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

 

I refer to your email dated 23 June 2016 and received on 23 June 2016; our
reference is FOI 2016-0546.

 

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

 

1. What steps is the fund taking to address the financial risks posed by
climate change? Is there a formal process for regularly assessing and
reducing exposure to these risks?

 

The primary objective of the Pension Fund is to provide for the benefits
of its members on their retirement and/or benefits on death, before or
after retirement, for their dependents, on a defined benefits basis. In
planning to achieve this objectives it is recognised that an appropriate
balance needs to be maintained between generating a satisfactory long-term
return on investments whilst taking account of market volatility and
risk. 

 

The Fund's Statement of Investment Principles recognises that social,
environmental and ethical considerations are among the factors which
investment managers will take into account, where relevant, when selecting
investments for purchase, retention or sale. 

 

Our appointed investment 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; Demand for energy is expected to
increase; 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.

 

This means that while the fund manager aims to capitalise on the potential
benefits from policy and technology transitions, they are also mindful of
the potential climate change risks that exist and this knowledge helps to
inform the engagement process with both potential and investee companies
going forward.

 

In particular, can you provide details of:

a. When the Board or Pensions Committee has explicitly discussed carbon
bubble risk and the financial implications of growing defaults and credit
risk for fossil fuel companies; and

 

The fund manager is regularly challenged by members of the Sub-committee
at performance review meetings to justify their approach to investing and
explain how they have dealt with social, environmental and ethical issues.

 

b. What action or strategy the fund has agreed upon, to manage and reduce
carbon bubble risk/exposure to fund members?

 

Within the parameters of the investment management agreement, the 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. Specific examples of fund
manager activity include:

Resilience

Kering - production of an environmental profit and loss account; Naver -
commitment to power data centre with 100% renewables energy; Praxair -
consideration of sustainability items embedded within every employee's job
descriptions; and Strategic Research Outputs - research papers on stranded
assets, and engagement with fossil fuel leaders on climate change
attitudes and strategies.

Opportunity

Tesla Motors - electric cars and development of energy storage solutions;
Alphabet - driverless cars, cloud computing and smart meters for home sand
business; Novozymes - use of emzymes to reduce GHG emissions and the
impact on the environment; and Strategic Research Outputs - development of
a methodology to measure the low carbon contribution to our portfolios.

 

2. The December 2015 Paris Agreement on climate change saw Governments
agreeing to keep global warming to well below 2 degrees, which will
require the overwhelming majority of the world’s proven fossil fuel
reserves to remain unburned, which would lead to substantial stranding of
fossil fuel assets held by corporations in which your fund may currently
be investing. On April 22nd 2016, the Paris treaty was signed by 175
countries. Since December 2015 how has your pension fund changed its
approach to climate change risks, given the Paris Agreement’s
significant ratcheting up in the global response to climate change risks?

 

The Pension Fund has not changed its approach to climate change risks, but
I would refer you to our answer to question 1 above and the recent
activity of the Fund Manager in developing their approach to climate
change.

 

3. Have you surveyed or formally consulted with your individual members or
employers for their views on your ESG policies or practices in the last 10
years?

 

The pension fund reviews its statement of investment principles, including
ESG policies, on a regular basis. This process includes consultation with
the Fund's appointed investment advisors and fund managers. Individual
members of the pension fund are not however routinely surveyed or formally
consulted as part of this process.   

 

4. How much does the fund spend on ESG engagement services and can you
give any examples of engagement activities relating to climate
change/carbon risk from the last 10 years?

 

The Fund does not employ ESG engagement services. An example of the
engagement activities carried out on our behalf by our Fund Manager
included participating as one of 18 active partners in the recent Mercers
2015 study you highlight below as a reference, with a view to them further
understanding the potential impact of climate change from an investment
perspective.  

 

5. Have you signed up to the UN Principles for Responsible investment?

 

The Pension Fund adheres to the principles of investment practice as
defined by CIPFA, the Chartered Institute of Public Finance and
Accountancy, and our Fund Manager has confirmed that they have signed up
to the UN Principles for Responsible Investment.

 

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 [1][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

[2]www.orkney.gov.uk

 

 

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