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

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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

Finance Services, Falkirk Council

I acknowledge receipt of your information request dated 23 June 2016.

We have 20 working days to deal with your request from the date that we received it, but hope to provide you with the information you are looking for at an earlier date where possible

Finance Services, Falkirk Council

1 Attachment

Dear Ric Lander

I refer to your FOI request dated 23.06.2016. Please find below our reply to your questions.

Question 1
In relation to the financial risks posed by climate change, the Fund has regular face to face meetings and telephone conference calls with its asset managers where the question of carbon risk, inter alia, is variously raised. The Pensions Committee also has the opportunity to question (and frequently does question) asset managers at quarterly Committee meetings on environmental issues. An officer of the Scottish Environment Protection Agency sits on the Pensions Board.
The Fund is in the process of engaging with its managers to ascertain the carbon intensity of their respective portfolios. This information will be collated and provided to the Committee for further discussion.
1(a)

• Investment Beliefs paper – 22/06/2016
• Investment Strategy - ESG Update – 11/03/2016
• Investment Sub Group – Further consideration of ESG matters – 28/01/2016

1 (b) The Fund’s approach to ESG matters is set out in its Statement of Investment Principles (SIP) which can be viewed at www.falkirkpensionfund.org. This highlights environmental issues as being an area of particular interest for the Fund. The Committee has agreed to hold an information session on ESG matters in late October/Early November at which time the issue of carbon risk will most certainly be discussed. This may or may not lead to a revision of the SIP.

Question 2

Falkirk Council Pension Fund is member of the Local Authority Pension Fund Forum (LAPFF ) and strongly supports LAPFF’s efforts in engaging with carbon intensive industries. The LAPFF represents the interests of 70 local authority pension funds with combined assets of around £175 billion. It therefore has considerable clout in holding such companies to account. The LAPF approach which is consistent with Falkirk’s is that, subject to the investment risk, ongoing engagement is preferable to outright disinvestment.

Falkirk Council was one of 18 LGPS Funds which with other investors co-filed a strategic resilience shareholder resolution at the AGM of Anglo American calling on the company to be more transparent over climate change risks to their business. It has also been supportive of the Aiming for A campaign spearheaded by LAPFF for greater openness amongst companies such as Shell, BP and Statoil. More information about LAPFF engagement in relation to ESG matters, can be found on their web-site at http://www.lapfforum.org/

In view of the heightened importance of ESG (and the focus on carbon emissions), the Fund has adopted the following belief for inclusion in its SIP.

Belief: Environmental, social and corporate governance (‘ESG’) issues can have a material impact on the long term performance of its investments
The Committee recognises that ESG issues can impact the Fund’s returns and the Committee aims to be aware of, and monitor, financially material ESG-related risks and issues through the Fund’s investment managers. The Committee commits to an ongoing development of its ESG policy to ensure it reflects latest industry developments and regulations.

Question 3

ESG policies form part of the Fund’s Statement of Investment Principles. Changes to the SIP are (and have previously been) consulted upon either directly with employers or with Employers and Union representatives on the Pensions Committee and Pension Board (formerly the Pensions Panel and prior to that the Investment Forum).

Question 4

Fees incurred relating to ESG matters are approximately £20k p.a.

As well as LAPFF, Falkirk Council also is subscriber to PIRC - Pensions & Investment Research Consultants Ltd, Europe’s largest independent corporate governance and shareholder advisory consultancy with over 25 years of experience in providing proxy research services to institutional investors on governance and other ESG issues. More information on PIRC activities can be found on their web-site. http://www.pirc.co.uk/

Questions 5

The Fund is not a signatory of the UN Principles for Responsible Investment. However, our external fund managers have signed up to the UN Principles for Responsible Investments.

Please refer to the enclosed leaflet which explains your right to complain about the handling of your case and/or the decision made.

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