Damien Pantling introduced the report and stated that he had noted a significant improvement of the report from quarter to quarter, with the main RI report being built to align with the RI policy approved by the Committee last quarter.

In preparing the TCFD consultation response, Damien Pantling stated that he reviewed draft consultation responses from the LGA, Barnet Waddingham, PLSA, LPPI and various other pools and LGPS funds. The response submitted was very much Berkshire’s view, having been written based on previous conversations in various forums, and through consulting Committee and Board members.

To summarise the response, it was the Fund’s view that pools should be mandated to do more through TCFD. It was important that this policy was not at odds with pooling policy. LPPI had prepared a verbal statement on net-zero before receiving a formal report next quarter.

Richard Tomlinson, LPPI, stated that LPPI had been on its net zero for about a year and a half. The formal targets had been submitted to IIGGC and had been accepted and published, with LPPI now in the work of implementing the work towards these targets.

The first asset class that was in scope was global equities, with additional asset classes being brought in through time. The first two of these would be real estate and corporate credit. The Fund had a large global multi-asset portfolio, with each of those different asset classes bringing different challenges and opportunities for a net-zero perspective. The long-term goal was be to have 100% of assets under a net zero approach by 2050, though the goal was to reach the target before this date.

When looking at net zero investments, there were a number of factors to consider. The first of these was the backward-looking component, looking at how assets owned today could be decarbonised. The second element would be the actions taken to improve the characteristics of the portfolio. LPPI had a series of engagement targets within the global equities component which would evolve through time as other asset classes were brought in. The final element was the forward-looking aspect, looking at the alignment with net-zero, Paris-aligned pathways. The target for the portfolio was a 1.5 degree pathway, which meant looking at the assets within the global assets portfolio and forecasting forward to the expectations of where their businesses are going based on what they say they are going to do. At present, LPPI did not have a technical solution to model this but hoped to have this soon, as it would enable LPPI to be more granular and precise on managing that level of commitment.

Councillor Da Costa stated that he believed that the industry was so far-off reaching the Paris target, and asked how LPPI would move assets to net zero. When looking at the actual activities, Councillor Da Costa asked if investees would be looked at in terms of impact, with poor carbon credentials having a higher rate of return or if LPPI would want to move to each investee to be net zero.

Richard Tomlinson stated that in terms of moving the portfolio, there were two elements to explore. The first was greening the portfolio in comparison to greening the world. Greening the portfolio was a task of improving the carbon footprint of the portfolio, which could simply mean selling assets which were emitting, and investing in sectors which had low carbon intensity. This was not LPPI’s preferred approach as it didn’t make a difference to the world, but simply made the portfolio look better. Instead, LPPI were looking to move beyond this. From this perspective, the portfolio was already in a very good place. The carbon footprint was significantly lower than the carbon footprint of the benchmark for global equities, a lot of which was to do with the philosophy and style of investing and the sectors that were being invested in.

In terms of the actions taken to maintain a solid footprint, this would take the form of engagement with companies to get them onto the pathway of aligning with the pathway. More broadly, significant actions were being taken on assets that weren’t currently in scope. For example, in terms of real estate, actions were being taken to make buildings more carbon efficient.

Councillor Da Costa stated that it was incumbent on the Committee to ask LPPI to prove it, and demonstrate how Paris-aligned targets were being set.

Richard Tomlinson stated that a significant element of this would be covered by the TCFD report which would be forthcoming.

Councillor Hilton stated that he would expect to see more and more companies moving up the scale used by the Transition Pathway Initiative (TPI). Using this would demonstrate that investments were moving in the right direction. The Committee’s fiduciary responsibility to pay out pensions was just as important as climate change, with these two issues running in parallel. A balance would need to be struck, and the Fund had come a long way in the last 18 months and the amount of effort that had gone in to ESG should be recognised. Councillor Hilton thanked LPPI for its work.

Damien Pantling stated that TCFD provided a reporting framework to prove the claims that LPPI made in terms of carbon emissions in the portfolio.

Alan Cross recognised that the Fund had been on a journey and would be on this journey for a considerable while to come.

Councillor Sharpe commented that along the journey, the industry had picked up and adapted to all of the ESG requirements. Ideally the Fund would move faster, but various constraints prevented this.

Councillor Bond commented that TCFD was the initiative of Mark Carney, former Governor of the Bank of England, who seemed committed to making a difference. IT was good practice to have circulated a draft response to the consultation, and commended officers.

Councillor Sharpe echoed Councillor Bond’s comments and stated that this was new to everybody, not just this particular Committee.

Councillor Hilton stated that the Fund was trying to control the things within its control. The issues beyond its control would have a much bigger impact on carbon in the world than the Fund could ever had. It was only when one could reach the largest emitters that goals could be reached in the long term.

Councillor Da Costa agreed with Councillor Hilton’s comments about the Fund’s fiduciary duty but stated that his original comments referred to having the information in order to make valid decisions. If the metrics aligned and the Fund had the correct targets, it could then make proper decisions. Regarding the TCFD consultation, Councillor Da Costa thanked Damien and agreed with his comments.

Councillor Maria Gee, Wokingham Borough Council, stated that she did not believe Councillor Da Costa’s request for proof to be unreasonable, as it shouldn’t be difficult to provide this evidence. Additionally, Councillor Gee asked why the Fund was presenting going further with the Paris Accord as not being compatible with paying pensions, and asked what evidence there was to prove that this was the case in the long and short term.

Richard Tomlinson stated that this was a fair challenge, and the extent to which there may be a trade-off between expected return and the transition was an issue debated a lot. Long term, the destination of having to decarbonise was clear. It was a matter of finding the balance between prudently investing the scheme’s capital in line with the gradual transition that was being made.

Bob Swarup commented that the issue was that people worried if there was substance behind the gloss. The Committee and Fund tried to address some of this when the responsible investment policy was introduced. Firstly, there was a requirement for continuous improvement which acknowledged that there would always be new information which would be looked at. It was important to point out that there was nothing to say you couldn’t go for net zero and not have returns, with the opposite being true. What was important to look at everything in a simple, clinical, evidence-based fashion to understand what was happening. Within the responsible investment policy, the Committee had made commitments on the issues it saw as being very important. This policy would be reviewed on a regular basis and would provide an opportunity to amend the goals and targets.

Aoifinn Devitt commented that there should not be a trade off in theory of achieving the goals of the Paris alignment and paying pensions. The point was that these processes were in their infancy and as a result, there was still an element of trade-off. The work being done meant that hopefully, in the future, there wouldn’t need to be a trade-off.

Councillor Sharpe thanked all for their comments.

RESOLVED UNANIMOUSLY: That the Pension Fund Committee notes the report and;

i)               Acknowledges the Fund’s RI dashboard, RI report, active engagement report and achievement of associated outcomes;

ii)             Approves the publication of the appendices contained within this report on the Pension Fund website

iii)            TCFD consultation response to DLUHC