Agenda item

The Group Manager for Funding, Investment & Risk introduced the report to the Committee and highlighted the following areas.

·  In March the Committee approved Phase 1 of the 2023 strategic investment review, which confirmed a diversified asset allocation with robust risk management to underpin more predictable employer contribution rates.

·  Phase 2 of the review focuses on the Fund’s net zero target, aligned with short and medium-term climate objectives.

·  The review examines whether the Fund can raise its ambition by bringing forward the current 2050 net zero target date, recognising the urgent and material financial risk climate change poses. The aim is to set targets that will drive real world change whilst achieving the appropriate risk/return required to meet our overriding investment objective.

·  Extensive engagement has taken place with various stakeholders throughout this process including elected Councillors, employers, and

·  trade unions, as well as a member survey.

·  In addition, the Committee held a workshop in October to discuss the implications of the climate analysis undertaken by the Fund’s investment consultant in terms of the impact on the investment strategy.

·  There was a broad consensus across the workshop, engagement sessions, and member survey to bring forward the net zero target date and the proposals are set out for the Committee to consider and approve.

The Head of Pensions addressed the Committee and summarised the engagement sessions and member survey results.

Stakeholder engagement sessions

·  11 sessions

·  172 attendees

·  8 different stakeholder groups

Topics covered in the engagement sessions:

·  our approach to responsible investment

·  our climate policy

·  carbon reduction progress to date

·  how our Paris-aligned investments work

·  our fossil fuel exposure

·  our approach to engagement and divestment

The general consensus

·  There is broad support for us to divest by 2030 from companies not aligning with net zero 2050.

·  Many stakeholders favoured driving real-world impact and seek greater ambition on climate change.

·  There is however broad concern about protecting the fund and sensibly managing investment risks.

·  Broadly consensus in the engagement sessions converges on seeking to achieve net zero 2040-2045.

Member survey

·  5,210 members completed the survey (11% response rate)

·  Majority of respondents aged between 55 – 74

·  3,876 people responded that it was ‘very important’ or ‘important for the Avon Pension Fund to take account of climate change when making investment decisions.

·  When asked about the level of investment risk we should take when considering net zero targets 39% responded that we should make a medium investment risk of net zero 2040-45

·  67% replied that it was important to both divest and engage with companies that are not aligning with net zero by 2050 or before.

Hill Gaston, Mercer addressed the Committee and highlighted the following sections from their report ‘Avon Pension Fund - Net Zero Review’.

Net Zero Approach - Key considerations & levers

·  Portfolio constructed from companies / assets aligned with a low carbon transition.

·  Investment in climate solutions that support economy wide decarbonisation.

·  Front-loaded portfolio decarbonisation with a focus on managing transition risk.

·  It is challenging to maximise every net zero approach as there are trade-offs associated. When applied in isolation, they may lead to unintended outcomes from a financial and sustainability perspective.

·  Based upon the Fund’s objectives and commitments to stakeholders, it is important to establish priorities and strive for balance which minimises financial implication (risk, return, diversification) and supports real world impact.

Executive summary - Key areas of progress to date:

·  Listed Equity decarbonisation is ahead of target.

·  Good progress on total fund climate solutions versus target (to have 30% invested in sustainable/transition aligned investments by 2025).

Four strategic pillars

·  Extending portfolio coverage of carbon analysis

·  Accelerating targets

·  Engagement

·  Selective divestment

Building net zero portfolios - Summary of Analysis

We consider that the net zero 2045 or net zero 2050 portfolios achieve a sweet spot between balancing portfolio decarbonisation and meeting fiduciary duty of the Fund. This may change in the future should more companies adopt earlier net zero targets. Comparing 2050 to 2045 depends on the decarbonisation pathway, e.g. a 2045 target with a more gradual pathway may be preferable.

Fossil fuels – to divest or not to divest?

·  Potential benefits of divestment / Trade-offs

·  Risk & decarbonisation: reduce portfolio exposure to ‘stranded’ assets and carbon intensity.

·  Escalation tool when engagement fails and companies are too slow to transition.

·  Signal to market about Fund's ambition and views.

·  Increase cost of doing business if enough investors deny fossil fuel companies access to capital.

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·  Not sufficient for net zero as other sectors / companies are also carbon intensive.

·  Engagement more effective when tackling systemic and non-diversifiable issues like climate change?

·  Limits real world impact if no longer supporting high emitters to transition through engagement.

·  Inconsistent with fiduciary duty if reduced opportunity set impacts returns?

·  How to implement in a pooling context?

Divestment / exclusions approach should be reflected in Avon policy. Potential to engage other Partner Funds to form a collective approach for Brunel to implement.

The Chair asked if any of the outcomes from the recent COP 28 meeting had an impact on the work of the Fund.

Hill Gaston replied that he did not initially think so and that the main statement that came out of the meeting was that there is to be a phasing out of the use of fossil fuels. He added that he believed that the Fund already has a credible approach to fossil fuels in place.

Jackie Peel asked how a judgement will be made regarding divestment.

The Group Manager for Funding, Investment & Risk replied that Brunel were key to this decision and have the same ambition as the Fund. She said that there would be a mechanism put in place for an annual review to be held and that this would include third party analysis.

She added that the Fund could seek to set a forward criteria that sets out their expectations and consider divesting from companies that are not aligned to their views by 2030.

Hill Gaston suggested that Brunel be tasked with constructing some alignment definitions.

The Group Manager for Funding, Investment & Risk said that a further report on this subject would come to the Committee in 2026 following annual reviews that are carried out by Brunel and officers from the Fund.

Councillor Joanna Wright asked what impact the Fund has on decisions made within the pool.

The Group Manager for Funding, Investment & Risk replied that when the Brunel pool was originated the founding concept was responsible investing and that climate has been a focal point throughout the last seven years.

She added that there was not always a consensus from across the ten clients in the pool, but this was increasing and said that they were at the forefront of what they want to achieve. She stated that the introduction of the Sustainable Equities portfolio and the Paris Aligned portfolio was an important step on behalf of the Fund.

She explained that the Fund can hold Brunel to account and that they in turn can hold the managers to account.

Councillor Wright asked what the Fund were able to do if they are unhappy about a particular investment.

The Group Manager for Funding, Investment & Risk replied that the Investment Strategy will evolve over time and that their level of investment in low carbon assets is already quite high. She added that through the recent workshop Brunel had learnt of the current ambitions of the Fund.

The Head of Pensions reminded the Committee that Brunel have a broad number of arrangements in place and so, if necessary, there were choices available for the Fund, from standard index funds to those focused on carbon reduction.

Councillor Toby Simon commented that he was comfortable with the recommendations that were being proposed and stated that he would not want the Fund to be in a less focussed pool.

John Finch said that he believed that there were still advantages and that more can be achieved by being in a pool than working on our own. He said that by doing so it will enable us to influence other pool members and that we need to tell the Government how good this arrangement is.

Councillor Chris Dando commended the officers and Mercer for a good report and proposed the recommendations within it.

Councillor Toby Simon seconded the proposal.

Councillor Joanna Wright referred to section 8.2 of the report where it states that ‘each year the Fund will receive a climate analysis from Mercer’ and explained to the Committee that she would like a meeting to take place in which she and the Chair discuss climate issues further with Professor Steve Keen and Carbon Tracker as they have been recently critical of Mercer’s analysis reports.

The Chair replied that he would discuss with officers a timescale to setup an online meeting and then issue an invite to the rest of the Committee for others to attend if they so wish.

The Committee RESOLVED to agree:

The following climate targets for the Avon Pension Fund:

1a) Clear tangible targets for climate action in the years 2024-30:

? By 2030 the Fund will divest from all developed market equity holdings in high impact sectors that are not achieving net zero or aligning to achieve net zero by 2050.

? The Fund will reduce carbon intensity of its listed equity portfolios by 43% and 69% by 2025 and 2030 respectively (versus 2019 baseline).

? By 2030 the Fund will reduce the carbon intensity of its corporate bond portfolio by 60% (versus 2019 baseline).

? 70% of financed emissions in material sectors are covered by active engagement by the end of 2024 and 90% by 2027.

1b) To bring forward its overall net zero target to 2045 (from 2050) and review this formally again in 2026.

2) To endorse and support collaborative engagement and climate policy advocacy work through membership of various industry leading climate advocacy bodies.

3) That the Committee supports nature-based investments and asks the Investment Panel to explore investment opportunities in 2024/25 and bring a recommendation to Committee.