Agenda item

At its December 2024 meeting the Pension Committee received 8 petitions demanding that APF divest from Aerospace & Defence (A&D) companies which supply Israel and from other companies which operate in Israel and its occupied territories. This paper does not recommend any particular course of action as it is a political and moral decision. Instead, it lays out the context, facts and trade- offs which the Committee should consider in coming to its conclusion.

The Head of Pensions began by thanking the public speakers for delivering a clear articulation of their views and said that the Fund welcomed the scrutiny of this issue.

He said that member consultation will take place following whatever decision the Committee makes today.

He explained that in December 2024 public statements were made to the Committee largely regarding the supply of arms to Israel and that today the Committee debates a report on whether it should exclude all Aerospace & Defence (A&D) companies from the Fund’s investments.

He said that this was a complex issue and that there were many layers to the decision which the Committee needs to consider.

He explained that within the report the Committee were being asked to consider supporting one of two options.

·  Option A: Exclude all Aerospace & Defence (A&D) companies

·  Option B: Continue to apply current policies on responsible investment and exclusions

He said that any decision made by the Committee would be in principle and subject to further legal advice and consultation with Fund members.

He explained that, to divest from A&D companies which supply Israel, the Committee should note that such a decision could set a precedent, potentially forcing the Committee to consider other conflicts in a similar way. He added that the Committee should also note the referred to legal opinions stating that, if a decision were taken on non-financial grounds, there should be no risk of significant financial detriment to the Fund, and scheme members in aggregate should support the decision within a wider context of related issues.

He said that any such decision based on non-financial factors is likely to be controversial among a material body of the scheme’s membership and open to legal challenge.

He informed the Committee that they could decide to set broader and more robust criteria covering conflicts in general, to avoid unique focus on Israel-Palestine. He said that this would require a definition of what constitutes a conflict and assessment of the companies involved. Such an approach may need to cover multiple conflicts, e.g. Israel-Palestine, Kashmir, Sudan-Darfur, Myanmar.

He stated that this approach could be very complex to execute, even if stock selections and exclusions were undertaken by external asset managers with independent expert advice. He said that officers do not recommend investment criteria covering conflicts in general.

He outlined the two options that were before the Committee for their consideration.

Option A: Exclude all Aerospace & Defence (A&D) companies

The Committee could decide to apply an A&D exclusion policy across the whole Fund, which would entail divesting from existing holdings and excluding these stocks in future. This option would substantially reduce risk of exposure to conflict zones and the risk of inconsistent application with potential legal challenge triggered by narrow focus on Israel.

Such a policy could be implemented through new funds which exclude the whole A&D sector. In assessing Option A, the Committee should consider related consequences, as set out in the report.

The Committee needs to decide if Option A is merited in order to convey important points of principle, set against points outlined elsewhere in this paper, e.g. incremental costs, armaments required for UK defence, local employment, etc.

Option B: Continue to apply current policies on responsible investment and exclusions

More than 90% of weapons sales by relevant A&D companies are to the UK government and NATO partners. Such weapons are core to NATO’s defence architecture, designed to shield western democracies against external threats from autocratic and hostile states.

Furthermore, the A&D companies in question supply weapons and equipment to Ukraine which have become critical in their defence.

The Committee needs to consider if the case for UK & NATO defence is part of the divestment debate and, if so, whether APF divesting from and excluding A&D companies can be consistent with the following:

·  UK & NATO countries purchasing weapons manufactured by the relevant companies.

·  Assisting Ukraine’s defence with weapons manufactured by the relevant companies.

·  More generally using equipment manufactured by the relevant companies for UK defence, noting that the UK government has decided to raise defence spending to 2.5% of national income.

If the Committee cannot reconcile the above points with divestment from A&D companies, it should decide to continue applying the Fund’s current investment exclusions for conflict-affected and high-risk areas (CAHRAs) underpinned by exclusion for controversial weapons.

The Head of Pensions highlighted the following other points from the report.

Alternative fund costs – to accommodate divestment from A&D companies

Portfolios with relevant A&D companies are held through Brunel in the passively managed Paris-aligned equity portfolio, with some exposure in Multi-Asset Credit and High Alpha Equity. The Fund also holds equity derivatives in the Risk Management Portfolio which include A&D companies, for which it would be more complex to apply an exclusion policy, so for the purpose of the cost analysis we have assumed these are physical equity holdings.

In the case of Paris-aligned equity, divestment would require the asset manager to create a new fund excluding A&D companies, in which APF would initially be the sole investor, with indicative annual costs of 8 bps (0.08%) which is 5 bps (0.05%) higher than the current fund, an additional c.£750,000 per year. Discussions with other LGPS funds and trade bodies indicate that no other LGPS can commit to such a new fund. However, if other investors were to join over time and total assets reached c.£5 billion, additional annual costs would be nearer 0.03% or £450,000. Hence a reasonable cost range is £450,000 - £750,000.

While further work would be needed to assess exclusion costs for other impacted funds, total additional costs would settle into a range of £0.75m - £1.25m per annum, with a mid-point of £1 million.

The Committee should also note that we assume one-off transition costs of moving to new funds would be 0.02% or c.£500,000.

In theory such additional costs would be borne through employer contributions which would be higher than otherwise, i.e. versus not divesting from A&D companies. This is hypothetical, assuming everything else being equal, and indicates the impact at an employer level.

Local Employment

The Committee may want to note that the Avon region has deep industrial heritage in A&D.

One of the companies which petitioners want the Fund to divest from is BAe Systems, which employs c.1,000 people in highly skilled roles across the region, along with many others through the supply chain.

The Committee needs to decide if local employment is relevant to its decision and, if so, whether APF divesting from A&D companies including BAe Systems is consistent with supporting 1,000 local jobs.

Legal Context

It should be noted that there is no legal issue with the Fund applying its current exclusions policy and sustaining investments in A&D companies, i.e. Option B:

·  The Fund is acting lawfully by investing in A&D companies.

·  The A&D companies in question are operating within the law of relevant jurisdictions.

·  Israel is not subject to economic sanctions, differing from previous divestment from Russia which was triggered by sanctions imposed by the UK government.

·  As confirmed in the opinion of Nigel Giffin KC in October 2024 (Counsel opinion on the LGPS and current events concerning Gaza Nov 24 lgpsboard.org) LGPS funds and Committee members are not liable as a result of holding investments in A&D companies including those which supply Israel.

If the Committee decides to implement an exclusions policy, the decision would need to have no risk of significant financial detriment to the Fund.

Faith Ward, Chief Responsible Investment Officer of Brunel Pension Partnership, addressed the Committee and commented that Brunel are responsible for managing the implementation of Avon Pension Fund’s Investment Strategy, alongside 9 other LGPS funds. 

She explained that in implementing the strategy, a range of responsible investment tools are applied, tailored to asset class, geography and level of operational control, including:

1. Restricting investment in companies that breach UN Global Compact Principles as well as specific exclusions of controversial weapons.

2. Integrating human rights risks into investment decision making, particularly in conflicted affected and high-risk regions.

3. Engaging with companies operating those regions.

Global Standards Screening identifies companies that are violating or are at risk of violating international norms as enshrined in the UN Global Compact Principles. These assessments are undertaken by a third-party provider - Sustainalytics - who have a dedicated team with extensive experience and expertise in human rights, law and international business.

The assessments are underpinned by references to the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, as well as their many underlying conventions.

Brunel apply an Avoid or Explain policy on all active listed market portfolios. All non-compliant companies are detailed in routine reporting with an “explanation” – this is discussed at Brunel Investment Committee level prior to application of the avoid or explain policy.

In addition, a product involvement screen for Controversial weapons which is used in conjunction with the human rights analysis supports exclusion criteria – examples of exclusions are included in the report.

The investment managers appointed by Brunel, in most cases, deploy similar screening exercises and this supports their integration into investment decision making and engagement.

In addition to asset managers Brunel are supported by a specialist engagement provider; their programme of work includes engaging with companies operating in high-risk regions with the purpose of enhancing human rights due diligence - and seeking appropriate disclosure by those companies.

The service provider has a dedicated programme of work focusing on companies operating in the Occupied Palestinian Territories.

The approach to managing risks that Brunel adopts on behalf of its partner funds related to human rights is in line with its responsible investment principles, however it is accepted that there is much more work to do by the investment industry.

Human rights therefore is one of Brunel’s top three Responsible Investment priorities.

Brunel use the strength and position of the partnership in the industry to increase the assessment and understanding of human rights and social risks, and by extension, the capacity to manage those risks and contribute to a reduction in actual or potential harms arising in our portfolios.

Councillor Chris Dando said that this was a very emotional issue and could not fail to be moved by the attacks that had taken place in Gaza. He added though that weapons from the same companies were also being used in the Ukraine so that they could defend themselves from the invasion by Russia.

He thanked the officers for a comprehensive report and the public speakers for their statements. He reiterated that members of the Fund would be consulted following the decision made by the Committee today.

He said that he welcomed the comments from Brunel and hoped they would continue to develop ways in which to hold companies to account.

Councillor Dando moved that the Committee should choose Option B: Continue to apply current policies on responsible investment and exclusions.

Councillor Mike Drew seconded the motion for the Committee to choose Option B. He said that he had sympathy with the public speakers

He welcomed that the views of Fund members would be sought following a decision in principle by the Committee and said that the Fund should continue to act as a responsible investor in the future.

Councillor Fi Hance wished to thank all involved on this issue and said that she agreed with many of the public views that had been raised. She said that she did not feel that the issue of costs were relevant to such a discussion and that while it was a matter for Fund members to decide upon, she would encourage the Committee to support Option A.

Councillor Joanna Wright thanked both the officers and the public speakers for their work on this matter. She called for the Government to address the conflict seriously and said that sanctions were required against Israel.

She said that the emissions that were created in the process of manufacturing weapons should be considered as part of the climate change debate and that their levels were against our current investment advice. She called for the Committee to support Option A.

Councillor Toby Simon commented that it had been an interesting debate and that he had been touched by the testimony from the public speaker who was a Social Worker.

He said that he believed it was a priority to be able to defend ourselves as a nation and greater Europe. He explained that as outlined in the report both Lockheed Martin and RTX are excluded from Brunel portfolios.

He said that having considered the issues raised and the content of the report, in particular matters of Defence, Costs and Local Employment he was minded to support Option B.

Robert Payne commented that he supported Option A and that he would have liked the views of Fund members to have been sought prior to this meeting.

Jackie Peel said that from a governance role Responsible Investing will continue to evolve and that the monetary costs of any change were negligible.

She said that the Committee have to be mindful of any impending Government decisions relating to Fit for the Future and that she would support Option B.

Wlliam Liew stated that these issues had been on his mind for some time and that the actions that have been carried out in Gaza cannot be defended.

He said that he did not feel that it would be justifiable to exclude all Aerospace & Defence companies and would support Option B followed by a full member consultation.

The Chair said that the consultation should clearly set out what the options for the Committee were and that the decision they make is not a final decision.

Councillor Dando concluded the debate by stating that the consultation must be on meaningful and legal options. He reiterated the point made by the Chair that it must be made clear that whatever the decision of the Committee today it is not a binding one at this stage and that they are promoting a way forward on this matter.

The Committee RESOLVED to make a decision in principle of selecting Option B, which is to continue to apply current policies on responsible investment and exclusions. (Voting: 10 in favour, 3 against)

This decision is now subject to member consultation to allow the Committee to reflect on members’ views.

Officers will carry out a scheme member survey based on the approach the Committee has decided to adopt. Conclusions from the survey will be considered by Committee later in the year.