Kent Council fund initiates revamp of its ESG policies

At a meeting held on February 7, the council’s Superannuation Fund Committee began a major review of its environmental, social and governance stance, including aligning investments as beliefs evolve.

Possible outcomes include the introduction of carbon footprint analysis and an appraisal of thematic opportunities. However, the fund does not plan to make any overnight changes.

At the conclusion of the meeting, a Kent County Council spokesman told Pensions Expert: “A progress report on updating our responsible investment policy will be presented to the committee at its next meeting in March, and a revised policy is likely to be discussed and adopted at the June meeting.”

The £6bn Kent Pension Fund, which recently lost £99m with the ill-fated Woodford Investment Management, has 450 different employers in it and 137,000 scheme members. The strategy has a deficit of £547m.

Green transition in early stages

A small proportion of Kent’s portfolio is invested with Impax Asset Management in global companies that derive at least 50 per cent of their income from environmental themes.

The local authority fund has also signed up to the UN Principles of Responsible Investment, and is a member of the Institutional Investors Group on Climate Change. ESG rating information is included in its manager selection advice.

However, the committee notes: “As a consequence of the fund’s fiduciary responsibility to the taxpayer, it will not impose restrictions upon the external investment managers on specific stocks or countries which they can or cannot invest in.”

While Kent is considering monitoring its duties as a responsible owner, it does own around £350m in fossil fuel extractors, which could leave it in danger of stranded assets in the long term. 

The fund explains that as it believes it is difficult to determine what activities should be prohibited and it is a matter of individual conscience.

“The committee cannot and will not take up positions on ethical issues,” it says. “So we will not select investment based upon ethical grounds, whether that is fossil fuels, tobacco or alcohol.”

Investment rationale aside, fossil fuel divestment is increasingly demanded by campaign groups and the public, as Jennifer O’Neill, principal consultant in the responsible investment team at Aon, points out: “There is often an element of political pressure for officers of these schemes to consider their approach.

“That is a multifaceted question, which is not black and white to answer.”

Carbon footprint analysis not member-friendly

Thematic allocations and carbon footprint analysis are some of the options put forward in a briefing paper for the committee by Mercer, Kent’s investment adviser.

“Thematic allocations to capitalise on changing environmental concerns are easily supportable,” says Pete Smith, senior investment consultant and principal, at Barnett Waddingham, but adds that carbon footprint analysis is more problematic.

He explains: “Carbon footprint analysis, as it is typically reported, is inaccessible to trustees and members.

“Reporting carbon reductions in terms of measures such as the equivalent number of cars taken off the road, does not help trustees and members understand the alignment of their portfolios with the Paris agreement target and the potential financial risks of not doing so.”

Regulation has been a factor in the take-up of ESG considerations. Kate Brett, principal at Mercer, points to requirements to address sustainability factors in public statements, both under EU legislation and UK regulations.

“In 2019, the UK government committed to net-zero greenhouse gas emissions by 2050 and released a green finance strategy to ‘align private sector financial flows with clean, environmentally sustainable and resilient growth’,” she says. 

Other local authorities are already taking action.

In 2019, the Merseyside Pension Fund announced plans to reduce its exposure to assets linked to climate change. To do so, it allocated £400m to a fund aligned to the 2015 Paris agreement’s goal of limiting global warming to 2C, managed by State Street Global Advisors and built with FTSE Russell.

Members are increasingly vocal too. Ms Brett notes: “Stakeholders may now apply direct pressure to trustees and members alike, in the name of stewardship. For example, North Somerset schoolchildren wrote an open letter to Ontario teachers regarding their pension scheme’s investment in the Bristol airport expansion.”

Another example is when “increasingly active university students are targeting universities to more strongly consider climate change issues in their investments, drawing on external movements such as Divest Invest and Extinction Rebellion”, she adds.

Squaring the circle

Among the barriers preventing pension schemes from taking meaningful action is a lack of standardised ESG assessment processes. This means ESG ratings agencies each have their own scoring system, which can confuse asset owners.

Yet there is an increasing amount of muscle-flexing by local authority funds and pools. “It’s right that they are helping lead the charge,” says Anna Copestake, partner at Arc Pensions Law.

“They have asset volumes that make managers sit up and listen. They have the leverage to challenge what managers can and will do.

“The more that managers are made to explain their ESG capability and justify their holdings, the more difficult greenwashing becomes,” she adds.

Public sector funds have been focused on these issues for many years, but the private sector is catching up quickly.

“There should really be no difference in importance between RI/ESG for local authorities and the government and for the private sector,” adds Penny Cogher, partner at Irwin Mitchell. 

Financial returns on their own should not rule the roost. Ms Copestake explains: “RI/ESG is as much about managing risk as it is about generating returns. The duty is to deliver promised benefits to members – so it often squares quite nicely.”