Hammersmith & Fulham weighs up fossil fuel divestment
The £1bn London Borough of Hammersmith & Fulham Superannuation Fund is discussing whether to lower its fossil fuel exposure as part of its next investment strategy review.
The fund is also looking for ways to influence companies with voting rights. According to environmental data provider CDP, only 12 per cent of companies provide incentives to their boards for the management of climate change-related matters within their organisations.
In a report for the council’s pensions subcommittee in February, the committee is recommended to approve a “reduced fossil fuel exposure plan” as part of the fund’s next investment strategy review.
The real win would be if we could find a way of getting smaller schemes engaged in ESG
The fund, which is a shareholder of the London Collective Investment Vehicle, currently has representation on a London CIV working group that is supporting efforts to identify a manager that can provide a passive equity ex-fossil fuel mandate.
“Once this has been set up, it would provide a credible option for divesting should the committee wish to go down this route,” the report notes.
The committee was also encouraged to enlist the scheme as a member of the Local Authority Pension Fund Forum.
The LAPFF is a collective shareholder engagement group with over 72 Local Government Pension Scheme members and combined assets of more than £200bn.
A council spokesman said: “Hammersmith and Fulham Council is reviewing its equity strategy, to ensure its pension fund is fully informed of a range of different risk areas, and that the equity portfolio construction remains in its members’ best interests.”
He added: “The review is also looking at restricting investment to low-carbon indices, moving away from funds reliant on fossil fuel production, for the good of the planet.”
Passive ESG is available to the big schemes
According to the report, “the pension fund’s largest allocation to fossil fuel companies remains in its passive equity portfolio, which is procured via the London CIV”.
The London CIV does not have any passive equity trackers that exclude fossil fuels, but “the significant cost savings of using the London CIV mean that the fund would like to remain on the passive fund platform”, the note states.
Ralph McClelland, partner at law firm Sackers, said that size was key to achieving a passive solution that corresponds with the scheme’s ESG requirements.
“If you have scale, you certainly can set up a fund that tracks a different index, and it looks to me like that is part of the strategy that the London CIV will be pursuing,” he said.
“It is always the big problem with trackers though, particularly I think for small schemes where they’re not going to be able to necessarily justify the costs involved in setting up an index that’s not a standard index,” he added.
Use voting rights to make a difference
The report observes that “the collective large equity holdings in the passive and actively managed funds” of LAPFF members offer substantial voting rights and leave them “better able to influence large energy companies such as BP and Royal Dutch Shell”.
Most pension schemes are led by concerns over the investment risks associated with ESG. McClelland said: “It is not the duty of those tasked with investing pension funds, including the LGPS, to pursue an ethical agenda.”
While companies are taking ESG more seriously, there are still businesses in domains such as oil and tobacco that remain exposed to regulatory risk and high volatility.
Carole Ferguson, head of investor research at CDP, cited the success of ExxonMobil investors in May 2017.
Investors collaborated and used a shareholder resolution to press the energy company into improving its transparency over its climate change exposure.
“Collaborative engagement by shareholders does influence management teams, even in large oil and gas companies,” she said.
Help smaller schemes
Richard Butcher, managing director of professional trustee company PTL, wants to see solutions found that will enable smaller schemes to participate in the debate in their own right.
Ethics v profit: Should pension funds divest from ‘sin stocks’?
PLSA Investment Conference 2018: A debate on investment in so-called sin stocks threw up questions around what it means for pension funds to act ethically, and whether the regulatory risk associated with such stocks makes divestment financially sound.
Hammersmith and Fulham is “being fairly innovative in trying to drive it forward”, he said.
“The real win would be if we could find a way of getting smaller schemes engaged in ESG, because at the moment there’s very little point in having ESG discussions, because they cannot influence a fund manager, let alone the underlying investment, to change their behaviours,” he added.