Responsible Investment consultation 2022

About the consultation

The Hampshire Pension Fund is part of the Local Government Pension Scheme (LGPS).

It is responsible for paying the pension benefits of 183,000 current and future pensioners. The Pension Fund Panel and Board (PFPB), who are responsible for the management of the Pension Fund, are keen to understand your views on its Responsible Investment Policy and the factors which the Board take into consideration when developing the Policy.

The consultation is open from 4 April 2022 to 31 May 2022. The information below summarises key aspects of our responsible investment approach. We would also encourage you to read the Fund’s Responsible Investment Policy before answering the consultation questions.

Give us your views

Online survey
About the Pension Fund

The Pension Fund invests the contributions of scheme members and employers in order to make returns which are used to support current and future pensions. These contributions are currently worth £9.6bn and are invested in companies all over the world by specialist investment managers that the PFPB have appointed.

The Pension Fund must make a sufficient return on these investments to pay pensions, both now and in the future. If the Fund’s investments do not make the necessary returns, then employers and ultimately current (active) scheme members may be required to make higher pension contributions or have lower pensions benefits.

Responsible Investment

The PFPB believe in the importance of being a Responsible Investor and take this role very seriously.

It is one of only six LGPS funds accepted as a signatory to the new 2020 UK Stewardship Code. It considers Environmental, Social and Governance (ESG) impacts alongside the financial returns of an investment because it believes these ESG factors will influence investment returns. The PFPB’s approach to Responsible Investment is set out in its Responsible Investment Policy.

This specifies how the PFPB expect its investment managers to consider ESG factors in their investment decisions and ongoing stewardship activities; which includes how they use the Fund’s vote as a shareholder and their ongoing dialogue with the management of the companies the Pension Fund is invested in. Investment managers are required to assess each investment and conclude that the long-term financial return is protected from the risk of:

  • detrimental social impacts or increasing health inequalities from the company’s products/services, such as armaments or tobacco
  • negatively contributing to Climate Change or other environmental issues, such as pollution and the use of plastic
  • the impacts of Climate Change
  • poor corporate governance, systems of control and a lack of transparency
  • a senior management pay structure that is biased towards managers making short-term decisions that are not in the company’s and investors long-term interests
  • the detrimental treatment of the company’s workforce or workers in the company’s supply chain on issues such as health and safety, gender equality and pay
  • dangerous business strategies, such as the creation of monopolies, that may expose the company or wider economy to unacceptable risk
  • any outcome damaging to human rights
  • reputational damage to the company, the Pension Fund in relation to its beneficiaries, Hampshire residents, or the general principles of the UK Corporate Governance Code; as a result of its approach to any ESG issue

The PFPB then uses these assessments to scrutinise investments on behalf of Fund members. By investors’ views being represented to company management and through voting as a shareholder, companies can be persuaded where necessary to follow good ESG practices and if they do not the Fund’s investment managers may choose to disinvest if this lack of progress changes the investment case.

The PFPB will consider disinvestment or exclusion of a particular stock, industry or country (see note below) or investment in specific ‘social’ investments where, based on an evaluation of ESG factors including the points above, it believes that the decision would be supported by a significant majority of scheme members and employers; the PFPB may take this approach so long as it does not result in significant financial detriment to the Pension Fund.

Note: As of February 2022 the Pension Fund had approximately £9m (>0.1%) invested in Russian companies. The Pension Fund is monitoring the situation with its investments managers and discussing the practicalities of exiting these positions.

 

Approach to addressing Climate Change

Although it is one of the many ESG issues the Pension Fund must manager the PFPB views the risk of Climate Change and the issues which contribute to it as a key risk to the Fund and of significant concern to all stakeholders. As a result, the Board supports the objectives of the Paris Agreement and believes that keeping a global temperature rise this century to well below 2⁰C (relative to pre-industrial levels) is entirely consistent with securing strong financial returns. To achieve this, the PFPB has committed that its investments will aim to have net-zero greenhouse gas emissions by 2050.

Note: Net-zero does not mean that the Fund’s investments will produce zero emissions. It means that emissions will be eliminated where possible, and where they cannot be eliminated, they will be offset by the equivalent emissions removed from the atmosphere.

This 2050 commitment is in line with the UK Government’s policies for decarbonising all sectors of the UK economy to meet its own net zero target by 2050. This is appropriate for the Pension Fund as an investor in the UK and a significant holder of UK government bonds. The progress that the PFPB has already made in reducing the carbon emissions of its investments is set out in its Taskforce on Climate Related Financial Disclosure (TCFD) report and annual Responsible Investment update for scheme members.

The carbon footprint of the Companies which the Pension Fund invests in through owning shares has dropped by 69% since 2019 and is 40% below the current benchmark for equities.

The Board is currently working with its investment managers to find further ways to reduce the overall carbon footprint of its investments. However, in some instances its investment portfolios will still include fossil fuel companies where its investment managers believe these companies will positively contribute to the portfolio or these companies are in the indices that the Fund’s index tracking portfolios track.

The PFPB believes that disinvesting from these fossil fuel companies is not the right strategy for addressing climate change at this time, for the following reasons:

  • If the Pension Fund’s shares in fossil fuel companies are sold, it will lose its ability as a Responsible Investor to engage with those companies, to hold them to account and to influence and support them in their move towards a lower-carbon economy. The investors that would buy these shares from us may not do this
  •  The necessary transition to a lower carbon economy needs to be managed carefully to ensure that it is a Just Transition – this means that the benefits of a low carbon economy transition are shared widely, ensuring that the areas of society who lose economically from the transition are supported. Simply disinvesting from fossil fuels will not achieve this
  • Some fossil fuel companies are playing an important role in the transition to a lower carbon economy, for example in developing and investing in renewable energy. These companies need support from investors as they develop these new carbon efficient alternative fuel sources
  • The economy still relies on many carbon-intensive industries, for example manufacturing, mining, chemicals, cement and transport, and many people rely on products that are derived from fossil fuels for example plastic containers, synthetic clothes, and medicines. In the short to medium term, there remains a reliance on fossil fuels to support our daily lives and the transition to a low carbon economy, such as producing the steel to build wind turbines. However, by investing in and engaging with these companies the Fund can support and quicken their transition to lower carbon alternatives to enable the required transition to a lower carbon economy

 

Thermal coal disinvestment

Although the PFPB believes that most fossil fuels are still required currently to support the economy and the transition to a low carbon world, this is with the exception of thermal coal. This is the coal that is used to generate electricity, for which there are cleaner alternatives and therefore which is not necessary for the transition to a low carbon economy.

This is consistent with the agreement of more than 40 countries at the United Nations’ recent COP26 summit in Glasgow to shift away from the use of coal. Although the Pension Fund’s investment in Thermal Coal are very small (0.02% of the Fund or £1.7m), it will work with its investment managers to remove this exposure from its investment portfolios.

Further information

For further detail, please read the Hampshire Pension Fund’s full Responsible Investment Policy, which is part of its wider Investment Strategy Statement.