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Green Liberal Democrats - Briefing Paper

Decarbonising Local Government Pension Schemes.

A briefing document for Lib Dem councillors

Introduction

Across the UK, Local Government Pension Schemes are investing over £16 billion in the fossil fuel industry, and are thus fuelling climate change and air pollution through their investments (1). They are also putting members' pensions at risk as fossil fuel investments now pose an unacceptable long-term financial risk to investors (2).

This short briefing for councillors addresses the risks of fossil fuel investments. It also highlights councils and local government pension schemes in the UK who are already divesting from fossil fuels and thereby protecting communities from climate change and ensuring financial security for pension-holders.

Ultimately, we want all businesses and investors to align with the Paris Agreement and the laws that the UK has just agreed to implement. This means halving emissions by 2030 and being Net Zero emissions by 2050. For many sectors of the economy its hard to judge this at the moment as they don't make or report their plans. Sir Ed Davey, Lib Dem MP for Kingston and Surbiton is working at the national level to make and enforce laws on radical transparency so companies have to make plans and report on this. In the mean time, no fossil fuel company comes close to meeting the Paris Targets, so we think this is a great place to start as part of a journey to total decarbonisation and derisking of our pension funds.

The fossil fuel industry is putting humanity in jeopardy

Climate change is already claiming thousands of human lives and damaging the health of hundreds of millions of people around the world (3). The fossil fuel industry is largely responsible for the climate crisis; just 100 fossil fuel companies have been the source of more than 70% of the world's greenhouse gas emissions since 1988 (4).

The Paris Climate Agreement aims to limit warming to well below 2°C and pursue efforts to limit it to 1.5°C. The recent Intergovernmental Panel on Climate Change (IPCC) SR15 report emphasized the need to limit warming to the more ambitious 1.5°C target; we now know that 2°C of warming comes with unacceptable dangers to humanity (5). However, the fossil fuel industry has about 5 times more fossil fuels in its known reserves than can be used if global warming is to be limited to 2⁰C (6). Despite this, it continues to explore for even more fossil fuels.

As a result, we are currently on track to create a world marked by extreme heat-waves, declining global food stocks, loss of ecosystems and biodiversity, and life-threatening sea level rise. Warming beyond 2°C would come with a huge human death toll, render vast areas of the planet uninhabitable and have serious implications for global peace and security (5,7). The business plans of the fossil fuel industry are putting humanity in grave danger; urgent action is needed to address this.

What is fossil fuel divestment?

Divestment is the opposite of investment; it means selling off assets. The fossil fuel divestment campaign asks that institutions such as councils and local government pension funds move their direct and indirect investments out of the fossil fuel industry as soon as possible, or over a period of 3 to 5 years. Funds can then be invested in a wide range of other companies and investment vehicles that are free of fossil fuels.

Fortunately, fossil fuel free investments can now outperform their counterparts that still include fossil fuels (8). Globally over 1000 organisations and tens of thousands of individuals have committed to divest over $8 trillion of assets so far, including over 80 pension funds and 120 local councils. Recently the city of New York set a goal of divesting its $189bn pension funds from fossil fuel companies within five years. The €8.9 billion Irish Strategic Investment Fund has also committed to divest from fossil fuels (9).

Divestment is important to protect investors from the financial risk posed by fossil fuel investments but it is also playing a crucial role in addressing the climate crisis. Fossil fuel divestment reduces the fossil fuel industry's social acceptability and erodes its political power. This is an important precondition for the introduction of legislation to restrict fossil fuels and accelerate the transition to renewable energy.

Fossil fuel divestment is also starting to present a material risk to fossil fuel companies who refuse to switch their core business models away from fossil fuels. In its latest annual report Shell cited continued divestment as a potential material risk to the company (10). Meanwhile, Goldman Sachs recently stated that the "divestment movement has been a key driver of the coal sector's 60% de-rating over the past five years" (11).

Local government pension funds are already divesting

In September 2016 the London Borough of Waltham Forest became the first council in the UK to commit to fully divest from fossil fuels, voting to sell its entire £24 million stake in oil, gas and coal. Nine more pension funds in the local government scheme have now made full or partial divestment commitments; Lambeth, Southwark, Islington, the Environment Agency Pension Fund, Haringey, Hackney, Croydon, South Yorkshire and Merseyside. Many have also committed to increase investment in sustainable projects like local renewable energy.

Many more councils have also passed supportive motions calling on their fund to divest - at least 14 councils across the UK have policies officially supporting divestment, including Sheffield, Bristol, Reading, Kirklees, Derby, Monmouthshire and Birmingham.

Why divest local government pension funds?

Protecting pensions

Local government pension funds have a legal responsibility to invest in the best interests of fund members - their fiduciary duty. However, by investing in fossil fuels, these pensions are being put at financial risk. Legal opinions by leading UK barristers show that pension fund trustees who fail to consider climate risk could be exposing themselves to legal challenge (12).

We know that the vast majority of fossil fuels need to stay in the ground to meet the globally agreed climate targets of the Paris Agreement. Action by governments to limit carbon emissions in line with this will leave fossil fuel reserves - the core assets of the industry - 'unburnable' (6). This 'carbon bubble' has the potential to leave £trillions worth of assets valueless or 'stranded'. Furthermore, recent research has shown that some fossil fuel asset stranding will occur even if governments do not introduce stronger climate policies, as the low carbon technological transition is already underway and is on course to automatically reduce fossil fuel demand (13,14)

Financial figures such as Governor of the Bank of England, Mark Carney, are already warning of these risks. Carney has warned that fossil fuel companies face "potentially huge" losses from climate change action that could make vast reserves of oil, coal and gas "literally unburnable" (15).

Concerns that fossil fuel divestment might impose a cost in terms of reduced opportunities for portfolio diversification, or in terms of foregone potentially profitable investments, are not supported by good evidence. Analysis published in October 2018, found that the New York State Common Retirement Fund would be $22 billion richer had it decided to divest from fossil fuel stocks 10 years ago (16). Fossil fuel free versions of indices such as the FTSI and MSCI have out-performed their parent indices over the last 5 to 8 years (17). It is true that this is a relatively short time period over which to measure performance; however, recent modelling studies by Grantham et al (18) and by Trinks et al (19) have found that fossil fuel divestment would not have impaired long term portfolio performance over a period of decades either. Therefore, the evidence indicates that fossil fuel divestment will not hurt investment performance but may instead protect Local Government Pension Funds from future loses when the carbon bubble bursts.

Protecting our communities

Fossil fuel investments are threatening our communities by fuelling climate change. Already floods are becoming more common, with the physical and economic impacts of climate change worsening yearly. In addition to driving climate change, fossil fuels are also causing direct damage to health through their contribution to air pollution.

By divesting, Local Government Pension Schemes can join with hundreds of public bodies addressing climate change risk and can invest in a positive future for our areas, our country and the world.

Key asks:

The first step is to make contact with the pension trustees, or if you are a pension trustee, to raise the following questions:

> Does our pension fund invest in Climate Wrecking Fossil Fuels?

> Does our pension fund invest in companies which do not plan to meet the urgent targets from the Paris Agreement to halve emissions by 2030 and to be net zero by 2050?

> Does our pension fund get managed in a way which takes into account the risks of climate change to the investments as well as focussing on short term returns?

> Can we work towards a Climate Smart pension?

What is a Climate Smart portfolio?

A Climate Smart portfolio is a range of investments which:

> Align with the Paris Agreement which means halving emissions by 2030 and net zero emissions by 2050

> Take into account the physical risks of climate change to investments

> Take into account the huge clean technology and green energy revolution we are going through and consider whether investments are robust to these huge changes

> Take into account the legislative changes which are sweeping the world such as Net Zero UK and whether the investments are sound in this world heading for zero carbon

> Consider other factors driven by the Climate Emergency which might materially impact on business performance such as liability for climate damages in high carbon sectors (think tobacco denying their liability for cancer) and consumer preferences for products which do not seriously harm their future.

More information

For more information on fossil fuel divestment;

End notes

  1. https://gofossilfree.org/uk/fuellingthefire/
  1. http://ieefa.org/wp-content/uploads/2018/07/Divestment-from-Fossil-Fuels_The-Financial-Case_July-2018.pdf
  1. https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(17)32464-9/fulltext
  1. https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/327/original/Carbon-Majors-Report-2017.pdf?1499691240
  1. https://www.ipcc.ch/sr15/
  1. https://www.carbontracker.org/reports/carbon-bubble/
  1. https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(18)32594-7/fulltext
  1. http://ieefa.org/wp-content/uploads/2018/07/Divestment-from-Fossil-Fuels_The-Financial-Case_July-2018.pdf
  1. https://gofossilfree.org/divestment/commitments/
  1. https://350.org/press-release/shell-report-impact-of-divestment/
  1. https://gofossilfree.org/wp-content/uploads/2018/12/1000divest-WEB-.pdf
  1. http://www.clientearth.org/pension-trustees-face-legal-challenge-ignoring-climate-risk-leading-qc-confirms/
  1. https://www.nature.com/articles/s41558-018-0182-1
  1. https://www.carbontracker.org/reports/2020-vision-why-you-should-see-the-fossil-fuel-peak-coming/
  1. https://www.ft.com/content/622de3da-66e6-11e5-97d0-1456a776a4f5
  1. https://www.corporateknights.com/channels/climate-and-carbon/divestment-made-ny-pension-fund-22b-richer-15386364/
  1. As of March 2019, Fossil Free versions of FTSI and MSCI indices had outperformed their parent indices over the last 5 or 8 years.
  1. http://www.lse.ac.uk/GranthamInstitute/news/the-mythical-peril-of-divesting-from-fossil-fuels/
  1. https://www.sciencedirect.com/science/article/pii/S0921800917310303