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An Assessment of Surrey Pension Fund's Response To The Climate Crisis – May 2021

At end Jan 2021, Surrey Pension Fund is £125M worse off than it would be, had it divested in May 2017. Here, our full report lays bare the committee's failure.

Executive Summary

As the Government made clear in January 2021, climate change is expected to have a significant impact on pension schemes’ assets, both due to the physical risk associated with a warmer planet and the transition risk that movement towards a low carbon economy brings in the form of lower valuations of many sectors of the economy. Without intervention, pension schemes will be overexposed to the financially-material risks of climate change.

The new Surrey Pension Fund (SPF) Committee has the opportunity to ask a key question “If I were investing today, would I choose to hold these investments?” The analysis below is designed to help Committee members to answer that question and fulfill your responsibilities, both to your members and to mitigate the impact of climate and biodiversity loss.

SPF’s performance over the last four years is analysed in six related areas, followed by recommendations for action. In summary, by continuing to own fossil fuels, SPF pursued a climate risk strategy which was sub-optimal. Simultaneously, this strategy resulted in lower financial returns, increased risks and was morally indefensible.

A. Engagement, the Fund’s chosen investment strategy, isn’t working

The previous SPF Committee insisted that there was strong evidence that their policy of engagement with fossil fuel companies was achieving results. We challenge this unsubstantiated claim and propose a three-phase evaluation process in an attempt to make engagement more effective.

A1. Measurement of progress. The Transition Pathway Initiative objectively assesses the carbon plans of major companies. In its latest report, October 2020, it reported that no major fossil fuel energy company had aligned its emissions pathway with limiting climate change to 2°C. This shortfall is the clearest sign of the ineffectiveness of engagement.

The carbon plans of each fossil fuel company (FFC) owned by SPF can be seen at a glance in the graphs of carbon performance from 2019 to 2050, measured in carbon emissions. For example, BP had a carbon intensity of 73.5 gCO2/MJ in 2019; this was projected to reduce only to 58.6 in 2050 while the required emissions intensity to achieve below 2oC is 9.98. Unless BP’s plans change radically, they will contribute to an increase of over 3.5oC.

A2. The engagement process carried out primarily by Robeco and the Local Authority Pension Fund Forum on SPF’s behalf seems totally insufficient in coverage and depth, not sustained through time and lacking sanctions such as binding resolutions. For example, a total of only 18 climate related resolutions were put to FFCs owned by SPF over 3 and a half years by Robeco. Four of those were made at the AGM’s of Royal Dutch Shell between 2017 and 2020, asking Shell to publish targets aligned with the Paris Agreement, each without success. In the period 2017-2019 Robeco voted Surrey Pension Fund’s shares in Shell in support of this resolution, but in 2020, they voted to abstain in line with Border to Coast Pension Partnership’s direction. At this year’s AGM, the resolution again failed.

This engagement process has to be rigorous, given that FFCs carry out extensive lobbying to maintain their profit levels and undermine action against climate change. For example, since Paris, BP and the other top five FFCs have spent $1 billion on greenwashing. They of course state that engagement is working, thereby delaying action.

A3. Lack of direction to SPF Investment Managers, including BCPP managers. As Committee member Councillor Watson pointed out at the December 2020 meeting: “We need to give clear instructions to our managers as to what we want them to do, and that is something we need to improve on. If we want our investment managers to take into account ESG factors, we need to be very clear on what we want them to do, and haven't done that to date. In terms of influencing our managers, that is absolutely crucial." This echoed the earlier Minerva Analytics report findings.

This lack of direction is particularly surprising, as the previous Committee had invested much time in developing an investment approach based on Sustainable Development Goals. To date, this strategy work has not been turned into action.

A good example of the consequences of this abdication of responsibility is the ownership of Suncor. At end December 2020, the Fund had over £1M invested in Suncor, which extracts tar sands, a climate destructive process, with a 2019 carbon intensity of an extremely high 89.25 gCO2/KJ and which is projected not to change significantly by 2030. It has not released data for Transition Pathway Initiative to make a 2050 projection. Under our challenge, Newton Investment Management have accepted Suncor’s “insufficiency in environmental progress” and confirmed that they are looking for “the opportunity to exit”.

B. Abysmal financial returns from the fossil fuel sector.

The previous Committee made various claims to explain the financial underperformance of this sector, including Covid-19 and cyclical trends, whilst also trying to justify continued investment through diversification. In practice, the Committee's investment strategy largely ignored this underperformance in the last decade and was blind to the inevitable decline in value as the sector continues to be replaced by renewables and energy conservation.

B1. Financial underperformance and its consequences

Once a market leader, the fossil fuel sector has been a poor investment for a decade. Financial returns have been abysmal. The energy sector, which does not include renewable energy, was the worst in the Standard & Poor’s 500 over the ten years to 2019.

Considering this underperformance, it is no surprise that two major financial management and advisory firms, BlackRock and Meketa, have separately concluded that divestment from fossil fuels improves, not weakens, investment returns. Their studies show that divestment from fossil fuels is a responsible course of action for the fiduciary duties of an investment fund.

In line with these findings, the Fund has suffered. In the period between May 2017 and end 2020, the Fund would have been £125 million higher if the Committee had divested, as they were urged to do.

This does not affect the pensions of members, which are guaranteed. These losses are paid for by Council Tax payers, through the increased contributions that local authorities, as major employers, have to make.

B2. The fiduciary responsibilities of SPF trustees

Surrey Pension Fund ruled out divestment as part of their investment principles. This stance conflicted with their fiduciary responsibilities as shown by these two extracts:

Minerva Analytics pointed out in late 2020 ““it is apparently not considered here or in the Border to Coast material that, at times, divestment might be the financially prudent thing to do because ESG risks are material enough. Such an approach is consistent with generally accepted definitions of fiduciary duty and so Surrey and the wider Border to Coast Pool membership may wish to consider this possible action, in the future.”

Ruling out divestment is also contrary to the observations of the Law Commission to pension funds in 2013 “They must not fetter their discretion; they must consider relevant circumstances; and they must take advice.''

This strongly suggests that every option must be kept on the table - regardless of SPF’s ideology - to ensure that risk to members’ pensions is properly managed. Excluding a possible course of action which may prevent harm from widely discussed risks (particularly stranded assets, see below) is imprudent and hence inconsistent with fiduciary duty.

C. The risk of stranded assets vs the energy opportunity of this decade

Climate change is acknowledged to be a first order risk to investments. Out of 550 investment professionals at 40 institutions in 2019, 44% agreed that the financial impact of climate change in investment outcomes over the next 20 years would be substantial, with a further 8% thinking the impact would be extreme.

Vast swathes of oil, gas and coal reserves will likely never be extracted and burnt because doing so would intensify global warming, worsening freak weather events and threatening the loss of farmland and huge population displacement. That could leave FFCs with stranded assets. The amount involved would be breathtaking. Around $900bn — one-third of the current value of big oil and gas companies — would evaporate if governments commit to restrict the rise in temperatures to 1.5C.

COP 26 is likely to drive global action to reduce carbon emissions to a minimum 2 degrees C and ideally to 1.5 degrees C. Markets will price in the risk of asset write downs by the world’s oil and gas companies. That may happen gradually but there is a risk of a sharp collapse in asset prices. The effects of writing off stranded assets would be felt across the business world. It would be one of the biggest ever shifts in the allocation of capital.

SPF accepted that the energy transition is a first order risk which would affect the value of investments across the whole portfolio, not just fossil fuels. Despite this, they did not carry out any formal assessment or scenario analysis of the risks of stranded assets, confirmed by their Freedom of Information reply in March 2021

In contrast, other local authority pension funds are taking action now to adjust their pension funds to mitigate climate change and to take advantage of associated financial opportunities including: divestment of coal; reduction in fossil fuel exposure by over 50%; investment in renewables, energy efficient processes and reducing their overall carbon footprint.

SPF must greatly expand its investments in alternative energy. The fund did put its toe in the water with private equity investments in clean energy in the last decade, totalling less than 1% of the fund’s value. Then in January 2019 SPF shifted part of its public market index funds into a Legal and General Investment Management low carbon fund. This investment, which totalled 8% of SPF’s assets at March 2020, has been one of its best performing. But SPF must go much farther - and as far as we can see - has taken no additional steps to invest in alternative energy supply and related technologies. The IEA’s Report to net Zero tells us that while ”Total annual energy investment surges to USD 5 trillion by 2030 in the net zero pathway” no new fossil fuel development should be part of this growth. SPF should boldly seize this extraordinary investment opportunity for the Fund over the next decade, while doing its part to respond to Surrey’s climate emergency declaration.

D. Fund members are ill-informed and not consulted

When asked by members about the Fund’s investments in fossil fuels, SPF accepted that their communications to all members could have been improved and specifically that they had not disclosed that members' money is invested in oil and gas. This is becoming an increasingly high-profile issue led by organisations such as Make My Money Matter.

Not only are members kept in the dark about how their money is used, there is increasing evidence that, once pension members are asked how they want their money invested, they clearly want their money to support climate friendly investments. In Summer 2020, the UK’s largest pension provider, NEST, announced divestment plans, which they supported by carrying out a YouGov poll of members, which showed 67% in favour of climate friendly investments and only 4% against.

When asked by a pension member to carry out a similar consultation in late 2019, the then Chair suggested that an exercise like this would be difficult to carry out. Perhaps the Committee placed little value on the views of their members, or they anticipated what the result would have been.

E. The compelling moral argument for divestment.

Fiduciary duty allows pension trustees to consider moral arguments in addition to financial considerations. Section B above shows that divestment is financially prudent and hence the moral argument is a legitimate, and indeed a necessary, consideration.

In order to avoid grave, substantial, and unnecessary harm, SPF has a collective moral responsibility to transition away from fossil fuels in line with the Paris Agreement’s targets of keeping global warming well below 2°C above pre-industrial levels with the aspiration of holding warming to 1.5°C. SPF should not own or profit from companies which continue to invest heavily in oil exploration and extraction even as the planet burns, who fund organisations that attempt to mislead climate science and who lobby against environmental regulations.

SPF has on occasion suggested that selling shares of fossil fuel companies would be “washing our hands of the problem” and only result in these shares being owned by other organisations.

This handwashing argument is morally bankrupt. It may be true that in the eyes of those harmed by climate change, they are not concerned who is carrying out the harm. However, it makes a difference to the person doing the harm. Investing in fossil fuels morally tarnishes the Fund by making SPF complicit in the injustices of the fossil fuel industry.

Owning and profiting from FFs is plain wrong. SPF has an opportunity to provide moral leadership, influencing others by your decision to divest.


F. Border to Coast Pension Pool

The working relationship between SFP and Border to Coast Pension Pool (BCPP) is work in progress. It should not however be used to obscure debate of the issues raised in this document. As the Communications Manager of BCPP, Ewen McCulloch made clear in April 2021, in reply to our questions about investment and climate change:

“We appreciate your interest to discuss our investment approach with us. However, the issues you wish to discuss remain the responsibility of our Partner Funds – it is the day-to-day administration and implementation that has been delegated to Border to Coast……. they remain responsible for these issues. Given the continuing stewardship responsibilities of our Partner Funds, we would strongly suggest you seek to discuss these issues with our Partner Funds rather than ourselves.”


1. Ask yourself “If I were investing today, would I choose to hold fossil fuel investments?”

Review and categorise the carbon performance of each FFC you own as follows:

Category A: Shares in those FFCs which are fully compliant with Paris requirements or are making sustained and rapid progress towards these requirements.

Category B: Shares where there is no reasonable prospect of compliance or the risk of absolute loss is clear and pressing. These should be divested.

If, as we believe likely, no companies can legitimately be placed/retained in Category A, you should announce your intention to divest all fossil fuel shares, encouraging all other local authority pension funds to carry out their own analysis and subsequent divestment.

2. Agree with your engagement partners measurable, timed objectives covering all owned companies which are:

engaged in the fossil fuel business, including its infrastructure

financial institutions providing funding or raising capital for fossil fuel companies

other companies in the highest carbon intensity sectors of the economy.

Further, acting in collaboration with other shareholders, support binding resolutions at AGMs.

3. Implement your strategic ESG policies by giving clear, explicit instructions to your investment managers, both direct and those under BCPP, to give priority to ESG and SDG factors in their dealings. Consider climate risk as a separate category of financial risk, rather than one of many ESG factors.

4. Carry out a risk assessment of the financial impact of stranded assets across your portfolio.

5. Ensure your members are fully aware that their money is invested in fossil fuels. Consult your members on this and act in accordance with their wishes.

6. Expand your investment in alternative energy providers, and in companies and sectors which will support the development of the green economy of the future. Avoid rear-view mirror investing.

7. Clarify the delineation of your asset allocation authority as between yourselves and the Border to Coast Pension Pool which supports your investment activities. In future avoid the current situation where you each appear to shift responsibility to the other for this critical investment function.

8. Insist that BCPP either establish internally or engage an external manager to offer both low carbon and alternative energy funds as investment options.

Surrey Pension Act Now

May 2021


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