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Nottinghamshire Pension Fund:
Divest! Invest!
The case for divestment from fossil
fuels and investment in the green and
local economies
Extinction Rebellion Nottingham Briefing
December 2019
2
Fossil fuel investments are financially risky and environmentally and socially damaging. Mainstream investment opportunities which exclude fossil fuel companies offer returns which are at least comparable to those which do not.
Fossil fuel investments therefore bring risks but no additional returns. By holding them Nottinghamshire Pension Fund is failing in its fiduciary duty towards members.
In place of holding shares in fossil fuel companies, the Pension Fund should make investments which are sustainable and help to mitigate climate change. There is also potential for increasing local green investments, which would benefit Nottinghamshire’s people, economy and environment.
3
Briefing Paper Contents Executive Summary ................................................................................................................................. 4
Introduction ............................................................................................................................................ 8
What is divestment? What is positive investment? ............................................................................... 8
Divestment trends worldwide ................................................................................................................ 8
Nottinghamshire Pension Fund .............................................................................................................. 9
Fund value and members ................................................................................................................... 9
Fund governance................................................................................................................................. 9
LGPS Central: Pension Fund pooling across the Midlands region ...................................................... 9
Fund holdings in fossil fuel companies ............................................................................................. 10
Responsible investment and the Fund ............................................................................................. 10
The case for divestment and for positive alternative investments ...................................................... 11
1. Investments in fossil fuel companies are investments in climate change .................................... 11
2. Investments in fossil fuel companies are increasingly financially risky ........................................ 12
3. Fossil fuel investments are a major financial risk to member employer organisations ............... 14
4. Share-holder engagement with fossil fuel companies will not change their business models .... 14
5. Cleaner investment funds are available, or can be developed, offering similar or better financial
returns ............................................................................................................................................... 17
6. Investments can be made which bring economic, social and environmental benefits to
Nottinghamshire ............................................................................................................................... 20
Extinction Rebellion Nottingham demands .......................................................................................... 22
4
Executive Summary
This paper has been prepared by Extinction Rebellion Nottingham to set out the case for divestment
by Nottinghamshire Pension Fund from its current holdings in fossil fuel companies, and investment
in cleaner alternatives, including local investments.
A key finding is that the financial risks which fossil fuel investments represent to the value of the
Fund and the comparable or perhaps superior returns offered by fossil-free investments mean
that the Pension Fund is currently failing in its fiduciary duty towards its individual and employer
members.
Nottinghamshire Pension Fund
The Nottinghamshire Pension Fund has a value of around £5bn, with around 330 contributing
employers and 47,000 contributing members. Contributing employers include all nine Local
Authorities within the Nottingham and Nottinghamshire area, Nottingham Trent University,
Nottingham City Transport, local social housing providers, local education institutions, Citizens
Advice branches and other local advice organisations, and other local third sector organisations.
The Pension Fund is administered by Nottinghamshire County Council, and overseen by the Pension
Fund Committee, comprised mainly of County Councillors in addition to other Local Authority, union
and pensioner representatives.
The majority of the Fund’s investments are in shares of stock-market listed companies. The latest
published holdings (as at 30 September 2019) showed that the Fund directly held around £154m in
fossil fuel company shares1. Most of the shares now held by the Fund are in funds managed by
external companies, which invest in a range of shares across stock market indexes. The majority of
these are in ‘passive’ funds which are linked to particular stock market indexes which contain a
portfolio of shares. A smaller amount is in ‘active’ funds, where the fund manager buys and sells
constituent shares more actively, meaning a more dynamically changing portfolio. Information on
the constituent shares in passive holdings is available online, though it is not straightforward to find
or to calculate the value of fossil fuel holdings within them. Active fund holdings are less
transparent. Based on our calculations we estimate the total fossil fuel holdings of the Pension Fund
to be around £250m2.
The Pension Fund has recently taken the decision to increase its infrastructure investments from 5%
to 8% of total fund value. Some infrastructure investments are in clean energy3. In correspondence
with Extinction Rebellion Nottingham the Fund has said it does not know what proportion of its
other infrastructure investments are in clean energy, or whether some investments may in fact be
high carbon, for example in fossil fuel power stations or transmission infrastructure.
The Pension Fund is in the process of integrating with LGPS Central, a company which will oversee
the management of the pooled assets of nine Midlands-based local government pension schemes, of
which the Fund is one. This integration is still taking place. Individual member Funds such as
1 Equity holdings at 30.09.19 https://www.nottinghamshire.gov.uk/media/2324589/2019-20-q2-equities.pdf
2 See footnote 14 (page 8) for an explanation of these estimates.
3 See list of infrastructure investments, containing investments in several green or renewable energy funds,
plus Langar Lane solar farm: https://www.nottspf.org.uk/media/2324590/2019-20-q2-infra.pdf
5
Nottinghamshire remain responsible for their own investment strategy, thereby maintaining the
power to decide on whether to divest from particular stocks. They also have the opportunity to
invest in a number of investment funds offered through the LGPS Central pool.
Divest/Invest
Globally, almost 1,200 institutions, with an estimated total value of $14.09trillion, have committed
to full or partial divestment from fossil fuel investments. These include around 160 pension funds4.
The case for divestment of Nottinghamshire Pension Fund from fossil fuels, and for investment in
clean and potentially local alternatives, is as follows:
Investments in fossil fuel companies are investments in products which cause climate change. These investments run contrary to the climate change mitigation policies of many employer member organisations of the Pension Fund. Increased atmospheric concentrations of greenhouse gases have dramatically increased the likelihoods of many of the extreme weather events we have seen over the last 20 years5. Climate change has been found to directly cause 400,000 deaths each year, while the fossil fuel economy causes an additional 4.5m deaths each year through air pollution, hazardous occupations and cancer6.
Investments in fossil fuel companies are increasingly financially risky. International efforts to reduce carbon emissions to prevent catastrophic climate change mean that the majority of known fossil fuel reserves cannot be exploited and must be left ‘in the ground’7. The market value of fossil fuel companies is based largely on the notion that all known reserves can be exploited. Understanding that they cannot be is growing quickly, and the point fast approaching where most reserves will be rendered valueless – becoming ‘stranded assets’. At this point there will a large reduction in the share price of fossil fuel companies and a corresponding reduction in the value of the Pension Fund. The UN Principles for Responsible Investment initiative recently forecast that the ten biggest oil and gas companies in the world – which include Shell, BP, ExxonMobil, Chevron and ConocoPhilips, all of whom the Pension Fund have investments in - will lose on average 31% of their stock market value by 2025 due to forthcoming changes in climate change policy around the world8.
Fossil fuel investments are a major financial risk to member employer organisations. The Nottinghamshire Pension Fund is underwritten by its member employer organisations. The financial risks of fossil fuel investments are therefore borne by these organisations.
Share-holder engagement with fossil fuel companies will not change their fundamental business models. The Pension Fund attempts to improve corporate behaviour by engaging with the companies it invests in. This is not resulting in significant change in the strategies of fossil fuel companies. No fossil fuel companies show signs of a radical shift to becoming solely, or even predominantly, renewable energy companies, or have adequate carbon reduction targets. Most do not even measure carbon emissions from the products they sell. The Pension Fund’s claim to be pushing fossil fuel companies as hard as it can to reduce emissions is undermined by their voting record at the 2019 AGMs of Shell and BP, where
4 Data updated at 09.02.2020, from https://gofossilfree.org/divestment/commitments/
5 https://www.carbonbrief.org/mapped-how-climate-change-affects-extreme-weather-around-the-world
6 DARA Climate Vulnerability Monitor 2012 https://daraint.org/climate-vulnerability-monitor/climate-
vulnerability-monitor-2012/findings/ 7 See https://www.ucl.ac.uk/news/2015/jan/which-fossil-fuels-must-remain-ground-limit-global-warming
8 https://www.unpri.org/inevitable-policy-response/forecast-policy-scenario-equity-markets-
impacts/5191.article.
6
they chose to abstain on key votes which would force the companies to reduce their emissions at a far more rapid rate9.
Other investments are possible: Share indexes developed by FTSE and others which exclude fossil fuel stocks offer returns at least comparable to those which do not, while avoiding the financial risks of fossil fuel assets. Investment funds based on these share indexes may already be available or could be developed on behalf of the Pension Fund. Meanwhile, Southwark local authority pension fund in London has taken its first divestment steps by committing 20% of its value to low carbon investments, a strategy which Nottinghamshire could follow. The Environment Agency Pension Fund has almost completely divested from fossil fuels over the last five years by changing its investments10. Further, an ‘active’ Sustainable Equities fund managed on behalf of LGPS Central is now available for the Pension Fund to invest in. To date it has not done so. Other fossil free active funds are also available.
Local investments could be made which bring economic, social and environmental benefits to Nottinghamshire. There is great potential for investigation by the Pension Fund of opportunities for making local investments in sustainable projects. Some of the Fund’s investments could therefore be positive ones for the people of Nottingham and Nottinghamshire, rather than investments in global corporations causing ecological and social breakdown. Local investments would help achieve the climate change mitigation targets of many of the Fund’s employer members, particularly Local Authorities.
Extinction Rebellion Nottingham Demands
In light of the information set out and the imperative nature of action on climate change, Extinction
Rebellion Nottingham calls on Nottinghamshire Pension Fund to:
Declare a target to divest from all fossil fuel-related assets within the next three years.
Publish an audit of all investments to give Pension Fund members and the public information
on the level of climate risk the Pension Fund is at. This would include the current level of
fossil fuel equity investments, and the levels of infrastructure investments in both low- and
high-carbon projects.
Produce and implement a plan for divestment and the alternative investments which will be
made. To include:
o As soon as possible, investment in the LGPS Central sustainable equities fund as well
as other fossil-free active funds. The level of such investments should increase over
the three year period, replacing active fund investments containing fossil stocks.
o As soon as possible, increase direct investments in equity of stock market-listed
renewable energy companies and other sustainable companies producing products
which benefit environmental sustainability. The level of such investments should
increase over the three year period, replacing direct investments in fossil fuel
companies.
9 More on the business strategies of BP and Shell and the Pension Fund’s voting record can be found in XR
Nottingham’s BP and Shell briefing document, at: https://divestment.xrnottingham.org/XRNottsPensionFundBPAndShellBriefingDocumentJan2020.pdf 10
See https://www.eapf.org.uk/investments/climate-change/tackling-climate-risk
7
o Progressive increases in clean infrastructure investments and decreases in
investment in funds which finance high carbon infrastructure.
o As soon as possible, investigation of opportunities for investments in passive equity
funds based on indexes which exclude fossil fuels.
o Investment in these fossil-free equity funds. Over the three year period such
investments to progressively replace investments in funds which include fossil fuel
equities.
o Investigation of new local investment opportunities which bring social and
environmental benefits. This may include opportunities for investment in employer
members’ own sustainable projects.
o Investment in viable local projects.
8
Introduction Current investments by Nottinghamshire Pension Fund11 in fossil fuel companies carry great financial
risks for individual and employer members. They are also investments in climate change, which is
causing mounting ecological and social damage that will in turn have deleterious effects on the
wider economy.
These financial risks and the comparable or perhaps superior returns offered by fossil-free
investments lead us to conclude that the Pension Fund is currently failing in its fiduciary duty
towards its individual and employer members.
This paper sets out:
What ‘divestment’ from fossil fuels means, and where money can be invested instead
Divestment trends worldwide
The Fund’s membership, governance and investments
The case for divestment and for positive alternative investments
Extinction Rebellion Nottingham’s demands
The section on the case for divestment and alternative investments is set out in six distinct
arguments. For each one an initial summary paragraph gives an overview.
What is divestment? What is positive investment? Divestment is the opposite of investment. It refers to getting rid of stocks, bonds, or investment
funds. Divestment polices, such as those aimed at the apartheid regime in South Africa in the 1980s,
are often adopted for ethical reasons. The case for divestment from fossil fuel stocks is, however,
multi-faceted, and goes a long way beyond ‘ethical’ arguments to encompass financial risk and the
demonstrable economic, social and environmental destruction caused by climate change.
The case for positive, sustainable investments in the green and local economies proceeds from the
same reasons. Investments may be in large companies developing sustainable products, in stock
market-linked sustainable investment funds, or in projects and companies bringing local economic,
social and environmental benefits.
Divestment trends worldwide Globally, almost 1,200 institutions, with an estimated total value of $14.09trillion, have committed
to full or partial divestment from fossil fuel investments. These include around 160 pension funds.
Eight UK Pension Funds have committed to full or partial divestment, including commitments to full
divestment by Southwark, Cardiff City, Monmouthshire and Waltham Forest local authority funds12.
The Environment Agency Pension Fund has also almost completely divested. Over 160 UK
11
Also referred to in this paper as ‘the Pension Fund’ and ‘the Fund’. 12
All data correct as at 09.02.2020 https://gofossilfree.org/divestment/commitments/
9
institutions have committed to full or partial divestment, including the University of Nottingham,
which has committed to full divestment.
Nottinghamshire Pension Fund
Fund value and members The Nottinghamshire Pension Fund holds assets to the value of around £5bn. As at March 2018
around 70% of the fund value was held in equities (also referred to in this paper as ‘shares’ or
‘stocks’), around 13.5% in property and the remainder in bonds and cash.
The fund has around 330 contributing employers and 47,000 contributing members. It is
administered by Nottinghamshire County Council for the Local Government Pension Scheme13.
Fund governance The Nottinghamshire Pension Fund Committee provides a scrutiny role and consists of nine County
Councillors, three City Councillors, two representatives of the Nottinghamshire Local Authorities
Association (representing district councils), two trade union representatives and two pensioner
members. The County Councillors are voting members, while the other members are non-voting.
The Local Pension Board provides a further scrutiny role. From the County Council website: “The County Council has set up the Local Pension Board to ensure that the pension scheme is properly run. In formal terms, the Board assists the County Council to secure compliance with pension legislation, and ensures the effective and efficient governance and administration of the pension scheme”.14
The Board has eight members. Four members represent employers in the pension scheme, and four represent scheme members.
LGPS Central: Pension Fund pooling across the Midlands region The Nottinghamshire Pension Fund is in the process of integrating with LGPS Central, a company
which will oversee the management of the pooled assets of nine Midlands-based local government
pension schemes, of which the Fund is one. This integration is still taking place. Individual member
Funds will remain responsible for their own investment strategy, thereby maintaining the power to
decide whether to divest from particular stocks. They will also have the opportunity to invest in a
number of investment funds offered through the Central pool. One of these funds, offered through
West Midlands Pension Fund – another of the nine members – will be discussed below.
13
Information from 2017-18 Annual Report https://www.nottinghamshire.gov.uk/media/1529118/annual-report-2017-18.pdf 14
https://www.nottinghamshire.gov.uk/npf/about-the-fund/local-pension-board
10
Fund holdings in fossil fuel companies In its latest list of holdings (as at 30 September 201915) the Fund directly held around £154m of
individual shares in fossil fuel companies – mainly Royal Dutch Shell and BP, plus Rio Tinto and BHP
Group (both of which have major coal mining interests).
Most of the Fund’s shares are, however, held in funds managed by external companies (called
‘Pooled Equities’ in the list of equity holdings - see footnote 13 above).
The majority of these are in ‘passive’ funds which are linked to particular stock market indexes which
contain a portfolio of shares. A smaller amount is in ‘active’ funds, where the fund manager buys
and sells constituent shares more actively, meaning a more dynamically changing portfolio.
Information on the constituent shares in passive holdings is available online, though it is not
straightforward to find or to calculate the value of fossil fuel holdings within them. Active fund
holdings are less transparent.
Based on our calculations we estimate the total fossil fuel holdings of the Pension Fund to be around
£250m16.
Responsible investment and the Fund
A presentation in November 2018 to the Fund’s Working Party by its advisors on Responsible
Investment highlighted the following:
The Fund has a legal duty to act as a responsible investor
It has a legal duty to invest in a sustainable way
The Fund may choose to invest/divest for ‘non-financial’ reasons, i.e. for reasons other than
financial return. These include ethical reasons, local investments, or impact investing
(investments with a socially or environmentally beneficial outcome). Two tests need to be
passed for these investments: that there is no significant financial detriment to the Fund,
and that decisions around these investments have support amongst the Fund membership.
The issue of climate change has become an increasingly pertinent one for institutional investors over
recent years. It is clear that it is given special mention as a consideration for pension funds within
Nottinghamshire Pension Fund and LGPS Central documents.
15
Equity holdings at 30.09.19 https://www.nottinghamshire.gov.uk/media/2324589/2019-20-q2-equities.pdf 16
This is calculated using the equity holdings as at 30.09.19 (see footnote 14). The total value of direct holdings in BP, Shell, BHP Group and Rio Tinto is around £154m. Investigation of fossil fuel holdings within passive Pooled Equities (managed funds) which track UK equity indexes showed an additional exposure to Shell of around £43m and to BP of around £24m. Through investments in funds which track US share indexes smaller amounts are held in ExxonMobil, Chevron, ConocoPhilips and TC Group (formerly TransCanada). As noted above, active fund holdings are less transparent and are not included in the calculation.
11
At present both the Fund and LGPS Central favour an ‘engagement’ strategy with fossil fuel
companies, holding shares in them and attempting through meetings and – particularly - voting at
corporate AGMs to encourage them to reduce their emissions, rather than divesting from holdings in
these companies. The Pension Fund Chair’s foreword to the Fund’s Annual Report 2017/18 says
“[The] engagement approach continues to highlight and improve the resilience of corporate
strategies at global resource companies in the wake of climate change agreements”17.
The Pension Fund has recently taken the decision to increase its infrastructure investments from 5%
to 8% of total fund value, to include additional investments in ‘clean energy assets’. The Fund has
invested in Nottinghamshire Community Energy to help finance the Langar Solar Farm, as well as in
several clean or renewable infrastructure funds18.
In recent correspondence with Extinction Rebellion Nottingham the Fund has said it does not
measure the carbon footprint of its infrastructure investments. It said it does not know what
proportion of its other infrastructure investments are in clean energy or other sustainable projects.
It also said it does not know whether some of its infrastructure investments are funding high carbon
projects such as fossil fuel transmission or power generation.
The Fund also has a local investment fund. However, it appears that investment in low carbon
projects is not a strong priority for it.
The case for divestment and for positive alternative investments
1. Investments in fossil fuel companies are investments in climate change Climate change is already resulting in hundreds of thousands of deaths around the world each year, while in addition the fossil fuel economy itself results in far more. Increased greenhouse gas concentrations in the atmosphere have been found to have dramatically increased the likelihood of many of the extreme weather events we have already seen, and these will only increase further in the future.
Many of the Fund’s employer members have carbon reduction policies as part of climate change mitigation strategies. The Pension Fund’s fossil fuel investments run contrary to these policies. These employer members include Local Authorities, Nottingham City Homes, Nottingham City Transport and Nottingham Trent University.
Owning shares in fossil fuel companies provides those companies with capital for the extraction, processing and sale of oil, gas and coal products. As conventional reserves are used up, oil and gas extraction in the form of non-conventional methods such as tar sands and fracking is increasingly locally environmentally destructive.
Climate change resulting from the burning of fossil fuels has been found to directly cause 400,000 deaths each year, while the fossil fuel economy causes an additional 4.5m deaths each year through
17
https://www.nottinghamshire.gov.uk/media/1529118/annual-report-2017-18.pdf 18
List of infrastructure investments as at 30 September 2019: https://www.nottspf.org.uk/media/2324590/2019-20-q2-infra.pdf
12
air pollution, hazardous occupations and cancer19. Scientific analyses known as climate attribution studies show the role of climate change in many of the extreme weather events of the last 20 years20. These include major floods in the UK in the year 2000, the 2003 heatwave, and the 2018 heatwave affecting the UK and Europe.
A full scientific assessment of the 2018 heatwave found that “it could not have occurred without human induced climate change”21.
The UK Climate Projections 2018, produced by the Met Office, found that the chance of such a heatwave occurring in any given year could increase to around 50% by 2050, just 30 years’ time22.
Many employer members of the Fund aim to reduce their carbon emissions as part of attempts to mitigate global climate change, while some Nottinghamshire Local Authorities also aim to reduce emissions from their area as a whole. Important progress has been made in meeting these aims. The Pension Fund’s investments in fossil fuel companies run directly contrary to this.
2. Investments in fossil fuel companies are increasingly financially risky Every country in the world has set carbon reduction goals and is currently in the process of
reviewing them with a view to increasing their ambition in order to meet the targets of the Paris
Agreement23. The UN Framework Convention on Climate Change Conference of Parties meeting in
2020 will bring these pledges together. Analysis shows that the majority of known fossil fuel
reserves must be left ‘in the ground’ if we are to achieve reductions in carbon emissions which
give us a reasonable chance of meeting the Paris targets. This will make most of the reserves
owned by fossil fuel companies valueless ‘stranded assets’24. The share price of fossil fuel
companies will fall accordingly, affecting the value of the Pension Fund.
A 2015 study by University College London’s Institute for Sustainable Resources, published in Nature,
showed that over 80% of coal, 50% of gas and 30% of oil reserves are "unburnable" if global warming
is to be limited to 2°C25.
The internationally recognised definition of ‘safe’ global temperature rise, and the aspirational goal
of the Paris Agreement on climate change, is a rise of no more than 1.5 degrees, meaning that these
proportions of unusable fossil fuel reserves are in fact even higher. Two degrees of warming is now
recognised as bringing catastrophic impacts26.
19
DARA Climate Vulnerability Monitor 2012 https://daraint.org/climate-vulnerability-monitor/climate-vulnerability-monitor-2012/findings/ 20
https://www.carbonbrief.org/mapped-how-climate-change-affects-extreme-weather-around-the-world 21
https://www.carbonbrief.org/northern-hemispheres-extreme-heatwave-in-2018-impossible-without-climate-change 22
See ‘headline findings’ at https://www.metoffice.gov.uk/research/collaboration/ukcp 23
For example, the UK Government has recently committed to the goal of the country having net zero emissions by 2050, putting pressure on others to follow suit https://www.bbc.co.uk/news/science-environment-48596775 24 See https://www.ftse.com/products/downloads/FTSE_Stranded_Assets.pdf for a guide to stranded fossil
fuel assets produced by FTSE. 25
See https://www.ucl.ac.uk/news/2015/jan/which-fossil-fuels-must-remain-ground-limit-global-warming 26
See IPCC Special Report on Climate change of 1.5 Degrees https://www.ipcc.ch/sr15/chapter/summary-for-policy-makers/
13
The Governor of the Bank of England, Mark Carney, has warned repeatedly about the prospect of
fossil fuel reserves becoming valueless ‘stranded assets’, with resulting major reductions in the value
of fossil fuel equities27 28.
In 2020 all governments will meet at the Conference of Parties to the UN Framework Convention on
Climate Change. Under the Paris Agreement’s ‘ratchet mechanism’, the expressed goal of this
meeting is for each country to pledge to meet far more ambitious carbon reduction goals than they
currently have, in alignment with the 1.5 degree target.
At this point, it would become clear that most fossil fuel reserves cannot be exploited and the
market value of fossil fuel companies could fall dramatically.
This is a very real risk to the financial performance of the Fund. Given that the Pension Fund is a
defined benefit scheme underwritten by member employers it is also a major financial risk to those
employer organisations (see section 3 below).
A 2014 analysis by the European financial services research and advisory firm Kepler Cheuvreux
looked at losses to the fossil fuel industry from stranded assets if national targets aligned with
limiting global warming to 2°C were adopted. (As noted above 2°C is no longer regarded as a ‘safe’
level of warming.) Even in this case it was found that the fossil fuel industry would lose $28 trillion in
revenues over two decades29. An estimate of $33trn losses over 25 years resulting from ‘climate
change policies’ was made in 2016 by a Barclay Plc energy analyst30.
In December 2019 the UN’s Principles for Responsible Investment initiative issued forecasts based
on what they call the ‘Inevitable Policy Response’ to climate change. The report said that markets
are systematically under-pricing climate risk and that inevitable increases in carbon cutting ambition
internationally will result in the ten largest oil and gas companies by market capitalisation will lose
on average 31% of their value by 202531. These companies include BP, Shell, ExxonMobil, Chevron
and ConocoPhilips, all of which the Pension Fund has investments in.
In January 2020 the Carbon Tracker Initiative predicted that value destruction in the oil and gas
industry will be higher the longer the delay in the introduction of more ambitious carbon cutting
policies, or if new policies are not properly anticipated32. This is because during the delay oil and gas
companies will continue to make capital investment in exploration and production infrastructure
which will become redundant when emissions limits are tightened.
All of these reports point to diminishing prospects for the fossil fuel industry, as well as potential
huge volatility in stock prices.
27
For example, see https://www.bbc.co.uk/news/business-50868717 28
The Bank of England and other Central Banks are working to highlight and manage the financial risks of climate change. Particular pressure is being placed on the banking and insurance sectors to contribute to the transition to a green and low-carbon economy. https://www.bankofengland.co.uk/climate-change 29
Kepler Cheuvreux: Stranded Assets, Fossilised Revenues, 2014 https://www.keplercheuvreux.com/pdf/research/eg_eg_253208.pdf 30
http://www.sustainabilityoutlook.in/news/fossil-fuel-industry-risks-losing-33-trillion-climate-change-756923 31
https://www.unpri.org/inevitable-policy-response/forecast-policy-scenario-equity-markets-impacts/5191.article 32
https://www.carbontracker.org/delays-to-global-climate-action-could-halve-value-of-new-oil-projects/
14
A Friends of the Earth report in November 2018 analysed the action that 19 large local authority pension funds are taking to address the financial risks of climate change. Nottinghamshire Pension Fund came in the bottom category of 'laggard'. The report says Nottinghamshire is taking almost no action to protect members' funds and that "their failure to act is a breach of their fiduciary duty"33.
3. Fossil fuel investments are a major financial risk to member employer organisations
The Nottinghamshire Pension Fund is underwritten by its member employer organisations. The
financial risks of fossil fuel investments are therefore borne by these organisations.
At the 2018 AGM of the Fund, an individual member asked a question about the financial risks of
stranded assets. The answer given was that “All pension fund members can be reassured that their
pensions are not at risk. The LGPS is a defined benefit scheme and benefits are funded by employers
and not dependent on the performance of investments”34.
It would therefore be member employers who would bear the financial costs of a major reduction in
fossil fuel equity value. Continuing investment in fossil fuels therefore constitutes a major financial
risk to employer organisations. As such it represents a risk to their services users, employees, and -
in the case of Local Authorities - Council Tax payers.
It is worth noting that at its last valuation in 2016, the Fund had a deficit of £621m. Employer
organisations are being surcharged over the next 20 years to make up this deficit35.
4. Share-holder engagement with fossil fuel companies will not change
their business models Both the Nottinghamshire Pension Fund and LGPS Central currently pursue an ‘engagement’
strategy, using meetings and voting to attempt to modify the behaviour of the companies they
invest in. This strategy is not bringing meaningful change in the investments and business
strategies of fossil fuel companies at anything like the speed required to meet emissions
reductions that will prevent catastrophic climate change. No companies show any signs of a major
shift towards becoming solely – or even predominantly - renewable energy companies. Meanwhile
a study highlighted by LGPS Central itself showed that most major fossil fuel companies do not
even measure the emissions generated by the burning of the products they sell.
The Pension Fund directly holds shares in several fossil fuel companies, including Royal Dutch Shell and BP. Through pooled fund investments overseen by external companies it has further investments in Shell and BP, as well as in US majors including ExxonMobil, Chevron and ConocoPhilips.
33
https://cdn.friendsoftheearth.uk/sites/default/files/downloads/Risky-Business-LG-Pension-Funds-Climate-Crisis.pdf 34
See record of 2018 AGM questions: https://www.nottspf.org.uk/media/1530509/agm-questions.pdf 35
See 2017-18 Annual Report ps 13, 20 & 43 https://www.nottinghamshire.gov.uk/media/1529118/annual-report-2017-18.pdf
15
The case of Royal Dutch Shell - seen as the ‘best’ of the fossil fuel companies on reducing emissions – helps to show how little ambition there is in the fossil fuel industry for addressing climate change. Shell has recently pledged to reduce its ‘Scope 3’ emissions (those from the burning of the fossil fuel products it sells). It says: "We intend to cut the carbon intensity of the energy products we sell, in step with society as it moves towards the goal of the Paris Agreement. That means fewer greenhouse gases emitted on average with each unit of energy we sell – by around 20% by 2035 and by around half by 2050."36 However, Shell also aims to sell more energy in the future than it does now. This means that their target amounts to a less than 50% reduction in their emissions by 2050.
As discussed above, the UN’s Intergovernmental Panel on Climate Change says that to have a reasonable chance of avoiding catastrophic impacts we must limit temperature rise to no more than 1.5°C. To achieve this we must reduce global emissions by 45% by 2030, and to net zero around 205037. Shell’s plans for a less than 50% emissions reduction by 2050 are completely out of step with the requited ambition. Indeed, their information (see footnote 35) does not specifically mention the 1.5°C goal. It is clear the company continues to look both ways on climate change and fossil fuels.
The Pension Fund also has major holdings in BP. BP is a far worse performer than Shell. It only reports on its operational emissions38. It says it cannot limit Scope 3 emissions as they are beyond its control. A recent shareholder resolution to make it do so was rejected39. Further analysis relating to Shell and BP can be found in XR Nottingham’s accompanying briefing paper on the Pension Fund’s investments in these two companies40. This includes examination of the voting records of the Pension Fund at both companies’ 2019 AGMs, where the Fund opted to abstain on resolutions which would have forced both BP and Shell to adhere to much tighter emissions targets.
As part of its engagement strategy, LGPS Central – the pool of nine Midlands-based pension funds of
which Nottinghamshire Pension Fund is one - works with the Transition Pathway Initiative (TPI). In
November 2018 TPI released a discussion paper on the oil and gas sector, looking particularly at
whether its constituent companies can transition their businesses in alignment with the Paris
Agreement on Climate Change41.
The paper looked at ten companies – which included Shell and BP - and found the following:
That none of the ten companies disclosed emissions from the burning of the oil and gas
products that they sell.
36
https://www.shell.com/energy-and-innovation/the-energy-future/what-is-shells-net-carbon-footprint-ambition.html 37
https://www.ipcc.ch/sr15/chapter/summary-for-policy-makers/ 38
https://www.bp.com/en/global/corporate/sustainability/climate-change/reducing-emissions/our-ghg-performance.html 39
https://www.cnbc.com/2019/05/21/reuters-america-update-3-bp-faces-climate-protests-at-investor-meeting-shell-gets-boost.html 40
https://divestment.xrnottingham.org/XRNottsPensionFundBPAndShellBriefingDocumentJan2020.pdf 41
See TPI, 2018 report here: http://www.lse.ac.uk/GranthamInstitute/tpi/wp-content/uploads/2018/11/Oil-and-gas-discussion-paper.pdf
16
That the emissions from the burning of the fossil fuel products the companies sell – as
calculated by TPI – dwarf the operational emissions of the companies.
That five of the ten companies studied have no emissions reduction targets at all.
That of the other five, three - BP, ConocoPhillips and Eni - have set targets relating to their
operational emissions. However, operational emissions are – in LGPS Central’s interpretation
of the paper – ‘irrelevant’ when set against emissions from sold products42.
That two companies - Shell and Total - have ‘expressed ambitions’ to reduce emissions
relating to sold products as well as operational emissions.
However, “No company has proposed to reduce its carbon intensity sufficiently to be aligned
with a 2 Degrees or Below 2 Degrees benchmark by 2050. No company currently plans to
achieve net-zero emissions by 2050”43.
That “In the long term, if dangerous climate change is to be avoided, only low-carbon
sources can be used”44.
It should be noted that recent developments with Shell – as described above – now mean that it is
aiming to reduce emissions from sold products (Scope 3 emissions). It purports to be aiming to meet
a ‘2 Degrees or below’ target, though whether its current actions would achieve even a 2 degree
goal is highly questionable.
Taking this and the discussion paper together, it can be seen that a large majority of oil and gas
companies do not currently measure the major part of their emissions: those from the products they
sell. Most have no reduction targets relating to these emissions, and those targets which do exist are
likely insufficient to meet the Paris Agreement targets relating even to 2 degrees of global warming
(now judged a catastrophic level of warming, as discussed above).
Engagement with these companies has a higher chance of bringing about reductions in their operational emissions, but in LGPS Central’s own words these are ‘irrelevant’. Engagement to date has had very little practical impact on the emissions of fossil fuel companies. Even those seen as better performers continue to ‘look both ways’ on climate change, paying lip-service to concerns while continuing to plan major new oil and gas investments and making limited clean energy investments. As discussed in detail in XR Nottingham’s BP and Shell briefing note, expert analysis projects that companies plan major investments in fossil fuel projects over the next ten years. As the TPI report says, it is only by transitioning rapidly to becoming solely clean energy producers that the most dangerous impacts of climate change can be avoided. Oil and gas companies have known about climate change for decades, while some have actively sought to undermine climate science and thwart effective policy to address it. Analysis by the group InfluenceMap also shows continuing major lobbying efforts by fossil fuel companies in support of expansion of oil and gas exploration and production45.
42
See discussion of the paper here https://lgpscentral.co.uk/wp-content/uploads/2018/11/LGPS-Central-Quarterly-Stewardship-Report-No-2.pdf 43
TPI 2018, p.24 44
Ibid, p.23 45
https://influencemap.org/report/How-Big-Oil-Continues-to-Oppose-the-Paris-Agreement-38212275958aa21196dae3b76220bddc
17
5. Cleaner investment funds are available, or can be developed, offering similar or better financial returns Mainstream investments in financial markets are easily possible without investing in fossil fuel
shares:
There is now a sustainable investment fund available which Nottinghamshire Pension
Fund can invest in through its membership of LGPS Central.
Analysis by FTSE and its US equivalent MSCI shows that share indexes which invest across
the stock market but exclude or weight very heavily against fossil fuel stocks perform at
least as well as those that include them. Nottinghamshire Pension Fund and its LGPS
Partners can use such indexes in designing diversified investment funds which perform
strongly. If properly designed these funds could both eliminate financial risk from
stranded assets and invest in the green economy.
The Environment Agency Pension Fund has almost completely divested from fossil fuels
over the last five years by changing its investments.
Southwark Pension Fund – which has a divestment policy – has as a first step invested
around 20% of its fund value in shares in low-carbon companies.
The ‘Clean 200’ lists publically traded companies whose shares represent positive
investment opportunities for the Fund.
The above points will now be looked at in turn.
West Midlands Pension Fund Sustainable Equities mandate
West Midlands Pension Fund - which is a member of the LGPS Central Investment Pool - in March 2019 appointed a company called WHEB to manage its global sustainable equity mandate. This will provide all nine Local Authority funds in the Central pool – including Nottinghamshire – with the opportunity to invest in a more sustainable way.
The WHEB website states that “[t]he mandate is expected to be managed using the same strategy as the existing FP WHEB Sustainability Fund…”46. The published holdings of the WHEB Sustainability Fund show that it invests in companies involved in areas such as ‘resource efficiency’, ‘sustainable transport’, ‘cleaner energy’, ‘environmental services’, ‘water management’ and ‘health’47. It currently has no investments in companies involved in fossil fuels.
This provides Nottinghamshire Pension Fund with a straightforward and strong opportunity for investing more sustainably.
46
http://www.whebgroup.com/investment-strategy/fp-wheb-sustainability-fund/fund-holdings/ 47
Holdings as at March 2019 http://www.whebgroup.com/media/2019/03/20190214-Portfolio-Holdings.pdf
18
Index-linked funds
The Pension Fund’s arguments for not divesting include the claim that the financial performance of
fossil fuel stocks is strong over time and that the financial risk posed by stranded assets48 is managed
by holding a diversified portfolio of shares across many different sectors.
Over recent years nine ‘sustainable investment’ indexes have been developed by FTSE49. These
include indexes which exclude or weight very heavily against fossil fuels. Similarly, the US-based
index provider MSCI has produced a suite of ‘Ex’-Fossil Fuel Indexes.
These indexes are designed for use by fund managers in developing or commissioning the
development of index-tracking funds, which hold a diversified portfolio of shares.
MSCI’s Ex Fossil Fuel Index excludes companies that own fossil fuel reserves. The chart below shows
the performance of the Index over the period 2010-2019, benchmarked against the performance of
MSCI’s main index (which includes fossil fuel stocks)50.
It can be seen that the performance of the Ex Fossil Fuel index is comparable to that of the main
index, and is in fact slightly superior.
A slightly differentiated index is the FTSE Divest-Invest Developed 200. This “is designed to
incorporate a combination of rules-based strategies to reduce exposure to companies from certain
ICB subsectors associated with the high carbon economy and obtain increased exposure to
companies engaged in the transition to a green economy”51. This index largely though not
48
It is notable that in recent correspondence with Extinction Rebellion Nottingham one of the administrators of the Pension Fund has said that stranded fossil fuel assets do indeed represent a financial risk. 49
See ‘Sustainable Investment’ indexes which can be selected from the ‘Type’ menu here: https://www.ftse.com/products/indexmenu?scrollToSection=Sustainable_Investment 50
Taken from https://www.msci.com/documents/10199/d6f6d375-cadc-472f-9066-131321681404 (Note that the figures and graphs in this factsheet update each month) 51
FTSE Divest-Invest Developed 200 Factsheet found at https://www.ftserussell.com/analytics/factsheets/Home/Search (Note that the figures and graphs in this factsheet update each month)
19
completely excludes fossil fuel companies: the share of oil and gas companies in the index is 0.91%,
compared to 5.54% in the benchmark ‘developed’ all share index.
The graph below shows returns of the index over the last 5 years against the all stock benchmark. It
can be seen that the Divest-Invest Index yields higher returns52.
Indexes such as MSCI’s (which has a FTSE equivalent showing similar results53) could be used by
Nottinghamshire Pension Fund and its LGPS Central partners to develop or commission the
development of funds which exclude investments in fossil fuel companies. The FTSE Divest-Invest
Index meanwhile proves the potential for funds which greatly reduce fossil fuel investments while
also investing positively in the green economy.
Financial performance of the share portfolio would be maintained with this new strategy, while the
financial risk of stranded assets would be eliminated.
Environment Agency Pension Fund
Having made the decision to divest in October 2015, The Environment Agency Pension Fund has now
almost completely divested from fossil fuels over the last few years by changing its investments. It
has achieved its divestment goals ahead of schedule54.
The case of Southwark Pension Fund
In September 2017 Southwark Pension Fund agreed a long term plan for the reduction of investment
exposure to fossil fuels. As detailed in its 2017-18 Annual Report55, as the first stage of its divestment
strategy the Southwark fund quickly made the decision to allocate £300m – around 20% of the
52
ibid 53
See FTSE All World Ex Fossil Fuels Index Series Factsheet https://www.ftserussell.com/analytics/factsheets/Home/Search 54
See https://www.eapf.org.uk/investments/climate-change/tackling-climate-risk 55
Annual Report 2017/18 https://www.southwark.gov.uk/council-and-democracy/pensions/pension-fund
20
whole fund’s value - to specific low carbon ‘passive’ equity. Equity is assessed as low carbon - or not
- using carbon footprinting.
The Southwark fund also agreed a new 5% target allocation to sustainable infrastructure, with £30m committed to Glenmont Clean Energy Fund which will invest in solar, wind and bio energy production across UK and Europe.
The Clean 200 list
The Clean 200 list has been developed to help investors such as the Pension Fund invest in the transition to renewable energy. It lists 200 publicly-traded companies that are leading the way on clean energy solutions56.
Lower carbon passive funds
As a footnote to this section it is worth noting that a number of lower carbon passive funds are
already available for investing in, including some offered by Legal & General Investment
Management, who manage well over £1bn of the Pension Fund’s passive fund investments.
Though lower carbon, it is unclear however from publically available information how much each
one limits fossil fuel investments, meaning that the Fund should instead act to ensure it has fossil-
free passive funds to invest in.
6. Investments can be made which bring economic, social and
environmental benefits to Nottinghamshire
There is great potential for investigation by the Pension Fund of local, sustainable investments. A number of employer members of the Fund have ambitious climate change mitigation policies and projects, for which the Pension Fund could be a source of investment. Some of the Fund’s investments could therefore be positive ones for the people of Nottingham and Nottinghamshire, rather than investments in global corporations causing ecological and social breakdown.
In its November 2018 presentation to the Fund’s Working Party, the Fund’s advisor on Responsible
Investment discussed investing for ‘non-financial’ reasons. The following examples were given:
Investing in local businesses or infrastructure
Divesting or investing for ethical reasons
Investing for impact, i.e. additional social impact from investment
In order to make such investments, it would need to be shown that they do not pose a significant
risk of being financially detrimental to the Fund, and that Fund members share the concerns which
would prompt these investments.
Local investment by the Fund offers a potential source of finance for local projects that seek to
reduce greenhouse gas emissions or have other socially beneficial aims.
56
https://www.asyousow.org/reports/clean200-2019-q1
21
As a result of unambitious Central Government policies, there is currently a lack of funding available
for investment in renewable energy and energy efficiency projects. Local investment by the Pension
Fund could replace this, providing benefits for local people, the local environment and the local
economy.
A number of employer member organisations of the Fund – including Local Authority members –
themselves have progressive policies and targets on climate change mitigation, and a number
operate specific renewable energy or energy efficiency projects.
While the presentation to the Fund’s Working Party mentions the potential for conflicts of interest in
decisions on local investments, the possible local benefits mean that all opportunities should be fully
investigated and conflicts of interest resolved wherever possible.
It is known that the Fund does have a local investment fund. Available information suggests however
that investment in low carbon projects is not a strong priority for it.
The Fund’s investment in Langar Solar Fund (through a £1.5m loan) provides a positive but to date
isolated example of the potential for investments which provide local benefits that are economic,
environmental and social. The Solar Farm is managed by Nottinghamshire Community Energy, a
Community Benefit Society “set up to deliver community-owned renewable energy, low carbon
energy and energy efficiency projects in Nottinghamshire”57. It recycles 100% of surplus profits into
local communities58 and helps to reduce carbon emissions.
57
See http://nce.coop/about/ 58
See http://nce.coop/community-fund/
22
Extinction Rebellion Nottingham demands In light of the information set out and the imperative nature of action on climate change, Extinction
Rebellion Nottingham calls on Nottinghamshire Pension Fund to:
Declare a target to divest from all fossil fuel-related assets within the next three years.
Publish an audit of all investments to give Pension Fund members and the public information
on the level of climate risk the Pension Fund is at. This would include the current level of
fossil fuel equity investments, and the levels of infrastructure investments in both low- and
high-carbon projects.
Produce and implement a plan for divestment and the alternative investments which will be
made. To include:
o As soon as possible, investment in the LGPS Central sustainable equities fund as well
as other fossil-free active funds. The level of such investments should increase over
the three year period, replacing active fund investments containing fossil stocks.
o As soon as possible, increase direct investments in equity of stock market-listed
renewable energy companies and other sustainable companies producing products
which benefit environmental sustainability. The level of such investments should
increase over the three year period, replacing direct investments in fossil fuel
companies.
o Progressive increases in clean infrastructure investments and decreases in
investment in funds which finance high carbon infrastructure.
o As soon as possible, investigation of opportunities for investments in passive equity
funds based on indexes which exclude fossil fuels.
o Investment in these fossil-free equity funds. Over the three year period such
investments to progressively replace investments in funds which include fossil fuel
equities.
o Investigation of new local investment opportunities which bring social and
environmental benefits. This may include opportunities for investment in employer
members’ own sustainable projects.