Agenda item

Presentation on Responsible Investment & Climate Change

To receive a presentation from Brunel Pension Partnership

Minutes:

The Director Finance explained that on previous occasions members expressed a desire to have further information on Brunel's approach to responsible investment and climate change. 

 

Laura Hobbs, Investment Manager & Helen Price, Engagement and Stewardship Manager gave an update on Brunel’s responsible investment work on behalf of the wider partnership. 

 

It was noted that Brunel brought together the assets of the ten like-minded funds and had embedded responsible investment throughout.  Brunel aimed to work closely with its clients to ensure that they we're meeting the investment and responsible investment outcomes. 

 

Brunel knew the COVID-19 pandemic had profound effects across economies, labour markets and the way that we go about our lives in general.   It had a huge impact on Responsible Investment and Environment, Social and Governance (ESG) investing, these were highlighted in the presentation.   It was noted that COVID-19 had highlighted some of the weaknesses that were present in the financial system, and had touched on all aspects from inequality to the environment, as well as the need for a sustainable recovery. 

 

The pandemic had highlighted the importance of capitalism as a force for good and had touched on pretty much all areas of Brunel’s responsible investment work.   The key responsible investment priorities undertaken by Brunel were explained in detail. 

 

Members were advised that climate change remained a key focus, as the Covid-19 Pandemic had wreaked havoc across the world, it was an example of what could happen if we didn’t actively address climate change.  It was evident that Governments could change policy and make policy decisions quickly when there was a crisis. 

 

Climate change heightened the importance of a sustainable recovery and adjustment recovery, in an effort to make sure that no one was left behind the COVID-19 crisis.  It was noted that Covid-19 had upped the spotlight on ESG, in particular the social aspects in terms of inequality, mental health, and labour standards, many of these aspects were highlighted within the presentation.   

 

The Committee noted that Brunel co-filed the first ever shareholder climate resolution at a major bank in December 2019, they asked Barclays to come up with a plan on how they would be phasing out lending to fossil fuel companies.  The Engagement and Stewardship Manager led to this piece of work.  Members were informed that this was an ongoing piece of engagement work, which would be followed up with Barclays Bank to ensure that come up with a plan on phasing out lending for fossil fuel companies that were not aligned with the goals of the Paris agreement. 

 

In addition, engagement work was taking place with BlackRock as the largest asset manager in the world.  It was noted that for a number of years, they agreed to incorporate sustainability and climate change into their investments and they were cited now as being one of the key drivers to making this change.  Members were advised that face to face meetings with Larry Fink, CEO had taken place and Brunel were pleased by their recent stance when they made the decision to vote against 53 companies and put another 244 on ‘watch’ for inadequate action over climate change risk.  Brunel’s engagement with Black Rock continued.  

 

It was explained that a Taskforce for Climate Financial related Disclosures (TCFD) in association with the Department for Work and Pensions launched a consultation to see if TCFD should be embedded into UK pension’s law.  The Investment Manager explained that Brunel had been doing TCFD reports for a number of years and were working on their most recent one.  This would enable clients to fulfill any obligations,  if this requirement was incorporated into UK pension’s law. 

 

 It was reported that Brunel had joined the Institutional Investors Group on Climate Change (IIGCC), this was an international global organisation on climate change to pilot a new set of methodologies and studies.  The net zero framework had been developed with 70 global investors representing $16 trillion. The aim of the project was to construct portfolios that kept global temperatures below 1.5 degrees of warming because there was very little understood about what a portfolio aligned to Paris agreement actually looked like.  In practice how that would perform from a financial point of view and meet the obligations was questionable.   

 

 It was noted that Brunel was among the five investors that had actually submitted some hypothetical portfolios,  so that they could be modelled.   The expectation was that climate change modeling would enable Brunel to see what the impacts were financially and whether those methodologies could  be advanced.  Members noted that Brunel were excited by the project and were looking forward to seeing the results. 

 

In terms of the social aspects from ESG and particularly the issues that Covid had created, namely racial inequality.  The Committee was advised that the Engagements and Stewardship Manager was leading on labour standards, modern human slavery and workplace mental health.  It was noted that she had also published a blog earlier in the year, which reflected the work undertaken so far and where further work was required.  It was explained that historically a lot of diversity talk focused around gender and they had been focusing on working with partners across the industry. 

 

Brunel was a member of the Diversity Project, which aimed to identify what action could be taken and what could be embedded within their stewardship policy.   Brunel had started to do identify where to access data and engage with companies, as well as the asset managers across the industry.  The committee was advised that Brunel were actively looking at the barriers and challenges. 

 

The pandemic had also created huge amounts of issues around the labour crisis,  particularly in Middle Eastern Countries.  It was explained that Countries in the Middle East had a considerably higher proportion of migrant labour working in industries,  such as airline freight,  leisure and hospitality.  However, as a result of the Covid-19 crisis, many migrant workers had been laid off from work and effectively they had very little employment rights. 

 

It was evident that many of their jobs were secured through employment agencies that workers had to pay and they often had to take out large loans in order to secure their jobs.  It was affectively deemed as modern human slavery, as such there were now huge amount of migrants stuck in the Middle East, unable to get back to their home countries as they had no jobs to fund their return travel.  

 

Brunel had been engaging with 38 other large investors who had written to 54 companies, who had operations in the Gulf and we're asking companies to commit to reimbursing recruitment fees and to perform exit interviews with the staff.  The aim was to produce best practice on labour outsourcing, so that the issues could be addressed. 

 

 It was reported that Brunel were working on a collaborative engagement with other investors on workplace mental health.  The Committee understood that mental health had a huge cost to the UK economy and to UK employers.  Members appreciated that the Covid-19 pandemic had heightened the fact that some people were struggling with isolation, homeworking, having to quarantine and obviously in some cases having to deal with grief.  The Committee were informed that Brunel had written to all companies within the Footsie 100 and had asked them to train line managers on how to spot signs of poor mental health,  how to assist vulnerable employees, offer increased flexibility and to make sure that employees know how to access support when they needed to. 

 

It was noted that this was the first year that Brunel had undertaken the Principles for Responsible Investment (PRI) assessment and this was assessed by a third party.   It addressed how Brunel was undertaking responsible investment and how well they were embedding it throughout the organisation across strategy and governance.  The presenting officer was pleased to report that Brunel was awarded A plus in every category apart, from listed equities active ownership which they were awarded an A.   Members were advised that the full report was available on the Brunel website if they wished to read it.  

 

Brunel was pleased to report that they had won the sustainable finance award for the pension fund of the year.  This award was for the strength of the Brunel pension partnership and the way that they collaborated with clients while workings together to ensure that responsible investment priorities and investment needs were met. 

 

The Chairman thanked Officers for the detailed presentation and he appreciated the work Brunel was undertaking on the Pension Funds behalf.  Members echoed the Chairman comments and welcomed the presentation.  It was agreed that a copy of the presentation should be circulated to all County & District Councilor’s, as climate change was clearly being debated in chambers across the County. 

 

In response to question, it was explained that the TCFD asked companies to look at how they assessed climate change risk through both their investments and also their own operations.  Members were advised that Brunel had been reporting on this for a number of years now and if this was to be embedded into UK pension’s law it was dependent on the outcome of the DWP consultation.  The Committee felt the effect on the investment compared to the ESG investment should be included in future presentations in order to add context.

 

The Independent Advisor echoed member’s comments in relation to ESG and Brunel’s ethos in respect of responsible investments.  He remained impressed and remained supportive of their approach. 

 

In response to a question, members were advised that Brunel invested through preferred party fund managers and they held those fund managers to account.  Brunel had a clear and transparent set of needs and which they communicated clearly.  For example, the climate change policy set out Brunel’s clear expectations on what they expected from managers and companies.  As part of this policy Brunel were committed to a stock take in 2022 and they were committed to assessing their managers and effectively deciding whether they should still remain appointed to manage the money of Brunel clients.

 

The Committee was advised that Brunel used lots of external data to assess companies and managers, the transition pathway initiative (TPI) was publicly available data.  The TPI assessed the way that companies looked at climate change risk,  so whether they had set goals or they set targets to reduce their emissions.  It considered the way that the companies were managing climate change at the board level and how their business model was aligned with the Paris agreement.   It was noted that Brunel had active dialogue with its managers on where a company was particularly poorly rated. 

The Engagement and Stewardship Manager explained  there was an escalation process in place, so if Brunel were engaging with companies when progress hadn’t  been made, there actions would be reviewed.  This was highlighted by Brunel discussion with Barclays relating to their lending practices to fossil fuel companies, which had resulted in a shareholder resolution.    This was a first for a European bank that actually led them committing to be net zero by 2050.  Brunel deemed this to be a monumental success and it would lead to more fruitful conversations with other banks in the future. 

 

In response to a question, it was explained that Brunel did not tell their fund managers what they could and couldn't invest in, as they wanted managers to really think about what they're doing and to be able to hold them to account.    The Committee was advised that Brunel had a variety of different engagement approaches,  so the fund managers themselves would be engaging on the client’s behalf.  It was explained that Brunel utilised a third party, Hermes Eos who would take a review of the holdings across all portfolios. 

 

One member questioned the sharing of workload with other funds, in order to avoid the repetition of work, as obviously there was a cost involved to Brunel and ultimately to its shareholders.   It was suggested that all the funds had the same basic need, therefore joint working would spread the cost and the benefits were wider spread. 

 

 In response to a question, it was explained that Brunel was part of a cross pool responsible investment working group.  The Engagement and Stewardship Manager  regularly met with peers across the pools and was in regular communication.  The pools shared best practice, what challenges they were facing  and what engagement objectives were undertaken.  In addition, there was a collaboration platform so collectively asset managers and asset owners could post on to that platform. 

 

In response to the question, it was noted that Exxon was no longer in any of the active portfolios and was only within the passive portfolios.  In terms of the social side of ESG, it was explained that the UK was entering into a period where unemployment would  increase rapidly and the number of jobs available would decrease.   Members were advised that Brunel were part of an engagement program on UK listed companies that were perhaps not performing to the best of labour standards and also in industries where unscrupulous labor practices were more common. 

 

The agriculture sector and the leisure and hospitality industry were known for zero  hour contracts and labour standards could be poorer.   Brunel’s focus area going forward was a collaborative approach  with the engagement provider Federated Hermes, as they were aware that labour practices was one of the key priority areas.   Members were encouraged by the direction things were going in, however they felt the comparison in relation to the TCFD would be beneficial to provide context, in order to aid decisions taken in relation to investments.   

 

Members referred to the IIGCC portfolio modeling, migrant workers in the Middle East and wondered if there was anyway of detecting any geographical bias.  As in some of these portfolio modeling there were countries who were not taking the move towards reducing fossil fuels.  The Committee was advised there were a  carbon metrics report available on the Brunel website.  The report detailed the carbon footprints all of the Brunel portfolios against their benchmarks. 

 

The Cabinet Member for Environment & Planning explained that each Autumn,  Gloucestershire  County Council reported on the progress the council had made on reducing carbon emissions across the County and  also across the whole range of our services .  He felt it would be very useful to include pension fund  information in this report.. Chris Crozier, BPP agreed to provide that information.

 

In terms of geography, it was noted that emerging markets were lagging on things such as Labour Standards and disclosures around fossil fuels, however these issues could be rectified through investor pressure.   For example an announcement was recently made by China about becoming a net zero economy by 2050, so evidently things were changing with investor pressure.    Consequently different risks in different geographies would impact on Brunel’s  engagement strategy and on its investment risk strategy. 

 

The Committee felt the presentation would be useful for all the employers within the fund, as this would help rid any misconceptions that this was just the Gloucestershire County Council pension fund, as it contained a multitude of other employers. 

 

The Chairman felt it would be advisable to make it clear what the Pension fund was about, as it was the largest liability that the council had.  It would be beneficial to show that the Pension Committee supported these initiatives that Brunel was taking in the  wider context. Members noted the Brunel website had a lot of usable responsible investment information available. 

 

The Chairman thanked Brunel Officers for a very informative presentation. 

 

Resolved

 

That the Committee received the Responsible Investment and Climate Change presentation.

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