The £5.8bn Cheshire Pension Fund is gauging the views of its members and participating employers on its investment strategy and environmental, social and governance policy.
Part of the LGPS Central pool, the Cheshire Pension Fund has more than 100,000 members across 300 employers.
The documents, part of a consultation launched in February, places the consideration of the financial risks of climate change at the heart of the fund’s investment considerations.
Despite being considered an innovative approach by the Local Government Pension Scheme fund, there are some perils for trustees in taking individuals’ opinions, experts have warned.
Involving members and employers in decision-making in this way is an innovative approach to responsible investment policy
Barry McKay, Barnett Waddingham
Councillor Myles Hogg, chairman of the Cheshire Pension Fund, noted that the fund has already commissioned an independent assessment of the carbon footprint of its investment portfolio and will produce an annual stewardship plan setting out potential climate change impacts and opportunities.
“I believe the approach of the fund to climate change will complement the climate emergency declarations made by all four councils in Cheshire and support their plans to lead the transition to a net nil-carbon position in their boroughs.”
The scheme will also explore the investment opportunities that become available as the world moves to a low-carbon economy. It already decided in 2019 to transition more than £500m of its equity portfolio to the LGPS Central Carbon Factor Fund, which aims to boost investment in companies producing technological solutions to meet the climate challenge.
Scheme tweaks investment strategy
On the investment strategy, the documents revealed that the pension scheme is changing some of its target allocations.
Over the past six years, the pension fund divided employers into four separate groups and operated a distinct investment strategy for each group.
With the number of employers increasing significantly in recent years, there are now groups of employers with different underlying characteristics and different long-term funding objectives.
Following a review of the sponsors, the scheme has reorganised these into four new groups – open employers, academies, exiting/closed employers and exited employers – each with its own target allocation.
Innovative approach to ESG
The Cheshire fund's initiative has been welcomed by experts, with Barry McKay, partner and actuary at Barnett Waddingham, saying that “involving members and employers in decision-making in this way is an innovative approach to responsible investment policy”.
“Some employers are already considering how to invest in an ESG or low-carbon fund to allow them to accelerate their climate change programme relative to the government targets, and this is a positive step towards allowing employers to be more proactive in achieving this.”
However, Mr McKay noted that this “could set an expectation of involvement and member representation on other decision-making committees”.
“This may be beneficial as a more diverse group may achieve better outcomes, but it’s important that any views are backed by knowledge and expertise of the issues being considered.”
Catherine McFadyen, head of LGPS actuarial, benefits and governance at Hymans Robertson, noted that a “lot of good work is being done across the LGPS on how to take ESG factors into account when making decisions on investment strategy”.
She also noted that the “LGPS typically receives lots of representations from campaign groups on issues such as climate change and fossil fuel divestment,” who might respond to this consultation.
Members’ views could create further friction
In a consultation on new ESG rules for pension funds, the government had initially planned for trustees to prepare a separate “statement on members’ views”, in which they would set out how they take account of member opinions on the issues covered in the statement of investment principles.
However, this proposal was scrapped in the government response published in 2018, as it had proved controversial among some pension commentators, who said it confused ethics and opinions with assessment of financial risk, and that it would be practically impossible to carry out.
David Brooks, technical director at Broadstone, took a similar view of the Cheshire Pension Fund consultation.
DWP scraps plans for schemes to check members’ ethical views
Controversial plans by the government to force trustees to outline how they have taken members’ ethical views into account in their investment strategies have been scrapped.
“While finding out the members’ views may be interesting, this does not seem to assist the decision-making process. The trustees should have the courage of their convictions and do what they think is right for the fund and the wider ecological issues.”
He noted that asking the views of members creates a further metric by which trustees “will be measured and criticised”.
“You will have extremes of views, with some members being enthusiastically for and some likewise against increasing focus on climate change issues. This could create further friction if the trustees take legitimate decisions to move away from their members’ views.”
Cheshire Pension Fund’s consultation is available on its website and closes on March 20.
