Agenda and minutes

The Chairman welcomed everyone to the meeting. He made a statement to the Panel regarding the recent COP 26 meeting. A copy of the statement can be found as an online appendix to these minutes, a summary is set out below.

I am encouraged by the commitments made across constituencies, sectors and national jurisdictions as part of COP including action on coal, vehicles, finance and nature. I see a lot of these pledges as a direct reflection of the work undertaken by the Fund.

As a Fund we have recently made a significant decision to realign our equities portfolio – moving over half a billion of equities to a Paris aligned fund which is designed to divert capital away from carbon intensive sectors and companies and reward those that are well positioned for the transition. This includes the complete exclusion of coal and tar sands companies as well as companies whose primary business function relates to the exploration, extraction or distribution of fossil fuels and will ultimately see us reduce carbon emissions by 7% each year in line with a 2050 net zero trajectory.

COP saw The Glasgow Financial Alliance for Net Zero (GFANZ) announce that capital committed to net zero by 2050 now stands at over $130tn.  Included within this staggering statistic are the IIGCC Paris Aligned Asset Owners group, to which the Fund belongs. This framework commits us not only to achieving net zero emissions by 2050, but also to delivering significant reductions in emissions in the interim. To that end, we have recently adopted two new decarbonisation objectives, which will see the Fund reduce absolute emissions by 43% by 2025 and 69% by 2030 (vs. a 2020 baseline).

Recognising the importance that commitments are backed up by tangible action we have agreed to divest over £280m from emerging market companies, which will produce an immediate reduction of Fund emissions by 28%; exiting regions where wholesale policy shifts are more difficult to achieve. The proceeds will instead be invested in a broad range of climate and environmental solution providers as well as companies that contribute to social sustainability.

Over the last 6 months we have increased our communications with members by utilising social media and connecting with our membership directly. This month saw the launch of our first ESG member survey; the results of which will be used to inform future strategy on climate.

The role for the Fund and its strategic partners remains as critical as ever. We will continue to collaborate, engage with companies to accelerate progress towards net zero, and continue to advocate for a supportive policy environment that will facilitate change ultimately for the benefit of our members.

At this point in the meeting declarations of interest are received from Members in any of the agenda items under consideration at the meeting. Members are asked to complete the green interest forms circulated to groups in their pre-meetings (which will be announced at the Council Meeting) to indicate:

(a) The agenda item number in which they have an interest to declare.

(b) The nature of their interest.

(c) Whether their interest is a disclosable pecuniary interest or an other interest,  (as defined in Part 2, A and B of the Code of Conduct and Rules for Registration of Interests)

Any Member who needs to clarify any matters relating to the declaration of interests is recommended to seek advice from the Council’s Monitoring Officer or a member of his staff before the meeting to expedite dealing with the item during the meeting.

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The Panel were minded to approve the minutes.

The Group Manager for Funding, Investment & Risk introduced this item to the Panel and highlighted the following areas from the report.

The legacy portfolio is ‘generalist’ in that it invests across a range of infrastructure assets whereas the to date Fund has invested in the renewables

portfolio, noting that Brunel have also offered a ‘generalist’ infrastructure portfolio in each investment cycle. Therefore, the legacy portfolio provides diversification within infrastructure for the Fund.

Brunel is in process of finalising the private market portfolio specifications for

the next cycle of private market investments. The portfolio specification has not been agreed as yet and Mercer advice is subject to the final portfolio offered.

This paper is for the Panel to explore the potential options and implications (operationally, timing) for the legacy portfolio. Allocations to the next cycle of private market portfolios offered by Brunel will be agreed at the Panel meeting in 1Q22, once portfolio specifications are available.

The Fund can allocate to the next Brunel infrastructure portfolio to maintain the current strategic allocation independently of any decision concerning the legacy portfolio.

The Panel, having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVED, in accordance with the provisions of the Section 100(A)(4) of the Local Government Act 1972 that the public should be excluded from the meeting for this item of business, because of the likely disclosure of exempt information as defined in paragraph 3 of Part I of Schedule 12A of the Act as amended.

The Panel were minded to note the report and next steps outlined.

The Investments Manager introduced this report to the Panel and highlighted the following points.

·  The Fund’s assets increased by £139m in the quarter (2.9% net investment return) ending 30 September 2021 giving a value for the Fund of £5,710m. Sustainable Equities did well despite the surge in Gas prices. No major concerns to raise at this stage.

·  Responsible Investment – COP 26: Onus to drive change on the private sector. Climate disclosures becoming more mandatory.

·  Draft TCFD report and Responsible Investment Annual Report due for discussion at Committee meeting in December.

Josh Caughey, Mercer addressed the Panel and highlighted points from within Appendix 2 - Mercer Performance Monitoring Report.

Executive summary

·  Funding level and risk: The funding level is estimated to have improved slightly over Q3 to just over 101%, as asset growth outweighed the rise in the value of the liabilities. It is estimated to have increased by 8% over the year to 30 September 2021.

·  The Value-at-Risk rose over the quarter to £1,206m, or 21.4% of liabilities, mainly due to the increase in the absolute value of the assets.  Risk as a proportion of liabilities has reduced over the year, largely due to the decision to move towards a dynamic equity option strategy.

Market Outlook

·  Global equity returns were flat over the quarter in US dollar terms on the back of heightened fears over recent increases in the price of energy and related supply chain disruptions. However, central banks and in particular the US Federal Reserve continued to assert that the rise in inflation was transitory and would dissipate over time. A weaker sterling led to positive global equity returns in the low single digits for unhedged UK investors.

·  Economic activity remained strong although the rise of the delta variant and shortages of people and goods in some sectors slowed activity through the quarter. While governments mostly avoided imposing new lockdowns, activities in certain face-to-face sectors, most notably travel, softened. In addition, ongoing supply disruptions in a range of sectors (most notably the auto sector) led to both less activity and higher prices.

·  We expect economic growth to remain strong, although supply disruptions and near term weakness in China, could lead to near term growth being weaker than we had thought. However, any growth shortfall this year may be offset by better growth next year, especially in China and supply constrained sectors. It seems likely that the impact of COVID on economies and markets will fade, especially in those economies that have vaccinated the most.

Performance vs. expected strategic returns

Returns have been above expectations for all equity mandates, given the strength of equity markets since 2019.

BlackRock Passive Global Equity - Returns are above strategic expectations and the mandate has tracked the underlying market.

Brunel Global Sustainable - Strong returns from equity markets and the mandate has now outperformed thanks to a strong third quarter.

Brunel Emerging Markets - Returns are above strategic expectations though the mandate has underperformed benchmark since inception.

Brunel Diversified Returns -  ...  view the full minutes text for item 33.

The Investments Manager introduced this report and highlighted the following points to the Panel.

·  The Liability Driven Investment (LDI) strategy was additive to returns with no triggers breached during this period.

·  The Equity Protection Strategy (EPS) was additive to returns in September but has since detracted since inception. It is currently ‘amber’ (under review) as it needs to be restructured following decision to change the equity allocations.

·  All Risk Management strategies are performing as expected.

·  The Funding and Risk Management Group (FRMG) has considered how many counterparties the additional global equity exposure should be split across, which counterparty should be selected and the process for implementation.

The Panel, having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVED, in accordance with the provisions of the Section 100(A)(4) of the Local Government Act 1972 that the public should be excluded from the meeting for this item of business, because of the likely disclosure of exempt information as defined in paragraph 3 of Part I of Schedule 12A of the Act as amended.

The Panel were minded to:

(i) Note the current funding level and LDI hedging position

(ii) Note the impact and performance of the equity protection strategy

(iii) Note the current collateral adequacy position

(iv) Note the current FRMG workstreams as summarised in sections 5-7 below

The Group Manager for Funding, Investment & Risk introduced this report to the Panel.

Shirley Marsh-Hughes asked if the Taskforce on Climate-related Financial Disclosures (TCFD) report could be shared in advance of the December Avon Pension Fund Committee meeting.

The Group Manager for Funding, Investment & Risk replied that she would do so.

The Panel were minded to note the forward agenda.