24th July 2018

The Greater Manchester Pension Fund has yet to engage with the arguments for fossil fuel divestment and present clear plans for decarbonisation of its portfolio.


In November last year, GMPF responded to our campaign for divesting their fossil fuel holdings with a 14 page letter. They acknowledged the risks from climate change and said they are committed to de-carbonising their portfolio by 2050. GMPF stated that their current approach could be called “partial divestment” – a first for the Fund.

FFGM welcomed the following things in the letter:

  • Multiple statements about risks from climate change

  • The statement that “there is a place for disinvestment”, and that the Fund has done it before.

  • That they could call their evolving approach “partial divestment”

  • Their positive investments in green infrastructure

  • A commitment to transparency

But we also challenged the lack of ambition, a general vagueness about the how and when of de-carbonisation and the very weak case against eventual full divestment. For example, the following two statements were made without any evidence to back them up:

  • Divestment “creates an unacceptable risk”;

  • The pace of decarbonisation must be consistent with our risk framework”, with the implication that going faster would not be consistent with that framework.

Supporters of our campaign have joined us in writing to the Fund, complimenting it for its commitment to partial divestment and making its portfolio compatible with the Paris Agreement. However, they warned that 2050 is far too late and that urgent action is needed to protect scheme members from the financial and environmental impacts of climate change. They therefore called on the Fund to divest from the most polluting fossil fuels, such as coal and tar sands, by 2020 and to fully divest from fossil fuels by 2023. They asked the Fund to explain why it is lagging behind other major cities such as New York, Paris and Stockholm, and nearby regions such as Merseyside and South Yorkshire, which have recently committed to divest from fossil fuels.

The Fund’s most recent response

Some of our supporters have now received a response signed by the Fund’s chair, Councillor Brenda Warrington.

She reiterates that

Greater Manchester Pension Fund’s (GMPF) long-term goal is for 100% of its assets to be compatible with the net zero emissions ambition in line with the Paris Agreement. GMPF has long identified climate change as a key financially material environmental risk and over the expected lifetime of the Fund, climate-related risks and opportunities will be financially material to the performance of the investment portfolio.

Unfortunately there is still no indication of timescale and priorities nor of the means by which this desirable state will be achieved, so we ask for this to be set out.

She goes on,

GMPF has a rich history of collaborative engagement, which is vital in managing the risks posed by climate change.  As a  member of the Institutional Investors Group on Climate Change and the Local Authority Pension Fund Forum, we are able to exert collective influence in bringing about positive action in transitioning to a low carbon global economy.

But unfortunately we are offered no evidence on what has actually been achieved, if anything. Our view, as stated and explained in our responses to the November letter1, and to the Fund’s Investment Strategy Statement2, is that engagement with companies can be an effective means for improving their governance and practice but in the case of firms whose main business is the extraction and sale of fossil fuels, this is unlikely to succeed. We cited evidence for this. Our own experience of engaging with BP at its recent AGM in Manchester (where GMPF and its representatives were not present, or at least not visibly so) also highlights this. We have previously been referred to the engagement reports of the Local Authority Pension Funds Forum3. We have indeed looked at these and can find no evidence of any success in reducing the greenhouse gas emissions caused by the continued efforts of the fossil fuel companies to extract and burn fossil fuels. To support continued engagement with fossil fuel companies we would need to know, how many tonnes of CO2 emissions have been saved through engagement with them? It would also be helpful, in the spirit of the Fund’s stated commitment to transparency, to know which fossil fuel companies have actually been challenged on their climate risks (financial and environmental) and how. We note that PIRC Ltd4 is to become the proxy for GMPF at company AGMs, so we would also like to see the record of PIRC’s attendance, voting and engagement record at company AGMs, and also the GMPF/LAPFF record prior to PIRC formally becoming the proxy (over say the period from October 2015 when we first asked the Fund to divest). That, together with a clear statement of the aims of engagement and the course of action to be followed when it fails, might convince us that meaningful engagement is a reality.

The letter continues:

GMPF challenges its investee companies to disclose their business models, and the assumptions that underpin their investment decisions, in order to assess alignment with a below 2 degree scenario.  The Transition Pathway Initiative provides a unique and valuable framework for tracking the progress of, and escalating, this engagement activity.  This will lead to better management of climate change risk, minimising adverse financial impacts and maximising the opportunities for long-term economic returns.

Again it would be helpful to know which companies have been challenged and with what results.

The Transition Pathway Initiative5, as the Fund notes in one of its Management Panel reports6, “aims to evaluate what the transition to a low carbon economy looks like for companies in high-impact sectors starting with oil and gas, mining, electricity generation, cement, iron and steel and autos. This enables asset owners and other stakeholders to make informed judgements about how companies with the biggest impact on climate change are adapting their business models to prepare for the transition to a low carbon economy.” It was set up by a consortium of investors including the Church of England and the Environment Agency Pension Fund (both of which have made divestment commitments).

It makes ratings of companies7 on the quality of their management of their greenhouse gas emissions and of risks and opportunities related to the low-carbon transition, and also on how they do perform now and might in the future compared to the targets and pledges of the Paris Agreement8.

This then assigns a level from 1-49. We think that,

1) It present it is a blunt tool.  It does not at this stage take the critical Scope 3 emissions into account (emissions from the use of the company’s products). As a result, Shell gets level 4, for example. The methodology used covers the operational (Scope 1 and 2) emissions (the Sectoral Decarbonisation Approach or SDA) but the TPA’s own report says that “The SDA has yet to be applied to the extractive sectors, namely diversified mining, and oil and gas.” These are critical sectors from a climate change perspective.

2) The data might not be altogether accurate  For example – it says BP reports on Scope 3 emissions.  So far as we know, from the AGM and their annual report, they don’t.

3) Not all companies that GMPF invests in are listed.  For example, Adani (coal), Statoil (oil) and Repsol (Oil).

It seems clear that the information is, at present, nowhere near adequate to inform the Fund’s investment decisions with respect to climate risk. Moreover, without dedicated climate change research officers in the Fund’s team, we doubt whether the Fund, which relies on firms of investment advisors and PIRC Ltd to advise it, can actually process and interpret the information the initiative might provide.

However, we do know that the TPI is evolving: it plans to include scope 3 emissions in its next version (though this is likely to be a slow process when so many companies refuse to report them10), so we suggest that the Fund stays involved but maintains a critical orientation to it, rather than being tempted to use involvement with it to greenwash the Fund’s strategy.

In this context, though, we must point to the overwhelming urgency for action on climate change. It is not good enough to wait for developments in measurement: we know already which companies are the climate change culprits11 and there is no excuse for failing to implement a divestment plan now.

The Management Panel report mentioned above also mentions two other initiatives that the Fund has had some involvement with. One of these, a European-wide project led by the World Wide Fund for Nature (WWF)12 that aims to foster the alignment of investment portfolios with a below 2°C scenario. This presumably means that the Fund’s investment portfolio (or significant parts of it) has been tested against the 2°C target. It would helpful to see a quantitative analysis of the results. That would be consistent with the Fund’s stated commitment to transparency. However, WWF did single out the GMPF in their report for a failure to respond to a request to reproduce information on their holdings (which is in the public domain but subject to a “please don’t reproduce without permission” statement).

Referring to divestment, the letter from the Fund goes on

The Fund’s Management Panel have considered this issue in detail.  The Fund’s long-term goal is for 100% of assets to be compatible with the net zero emissions ambition by c2050 in line with the Paris Agreement.  However, the view of the Fund, and of its advisors, is that the programme of divestment to which you refer would involve significant risk of financial detriment.

But this is just a repeat of the Fund’s previous statement. There is no explanation of what the risk of divestment is. There is no response to the question we posed: “Why does GMPF think this is a significant risk when other big funds do not, and have taken precisely this divestment action”. FFGM demonstrated back in 201613 that, on the basis of performance of industry indexes (comparing those with fossil fuels and otherwise equivalent ones without) that there is no risk from choosing to dump fossil fuel stocks, and indeed, performance could be better without fossil fuels. “Legendary Investor” Jeremy Grantham, Co-Founder of the Grantham Foundation for the Protection of the Environment (which incidentally manages the Transition Pathway Initiative), demonstrated the same thing this month14. He concluded that the peril of divesting from fossil fuels is mythical. On the basis of a comparison of performance, sector by sector, of the 500 biggest companies listed on the New York and Nasdaq exhanges, he found that,

…if investors take out fossil fuel companies from their portfolios, their starting assumption should not be that you have destroyed the value. Their starting assumption should be until proven otherwise, that it will have very little effect and is just as likely to be positive by 17 basis points as negative. That is an amazing contradiction to what every investment committee has ever said, as far as I am concerned.”

He concluded that:

Investors with long-term horizons should avoid oil and chemical stocks on investment grounds. They face a sustained headwind. In contrast, investing in companies that benefit from decarbonising the economy, although they come with no guarantee of success, do offer a sustained tailwind; their top-line revenues will certainly be growing faster than the rest of the economy. Ethical arguments for divestments are simply not necessary. They are a pure bonus.”15

We would also note that there is no record of any discussion of divestment in the Management Panel minutes for 2016-7 that have been published. There is mention of it in one Management Summary (to the Advisory Panel) but no record of discussion.

The letter from Councillor Warrington goes on:

This position is kept under regular review and you may be interested in the further background provided within the attached recent report16.

This report on the Fund’s Investment Strategy Statement, following the public consultation, repeats a lot of arguments made before. FFGM is cited and they do acknowledge our point about strengthening their ambition on investment in low carbon as stated in their Investment Strategy Statement, but there is no engagement with our critique of the engagement strategy. Will the Fund now respond to our arguments?17

The letter concludes:

I hope that this assists in providing much of the context behind the Fund’s position, and details of the many actions that we are taking to facilitate an orderly transition to a low carbon economy.

In the meantime, I wanted to ensure  you had seen the Environmental Audit Committee’s response on our approach18, which they regard as being in the highest category of engagement.

But as for the Transition Pathway Initiative, this report merely gives broad brush ratings and the Fund scores for its fine words recognising the problem of climate risk. Real action is another matter.

Conclusion: questions to be answered.

In summary, we have the following questions for the Fund and anticipate considered relies in the spirit of transparency for which the Fund is noted.

  1. Decarbonising the Fund’s portfolio:
    When will the Fund release a structured plan for its strategy of decarbonisation of its portfolio that explains timescales, priorities and targets?

  2. Engagement strategy and its outcomes:
    – How many tonnes of CO2 emissions have been saved through engagement with fossil fuel extraction companies?
    – Which fossil fuel companies have actually been challenged on their climate risks (financial and environmental) and how.
    – What is the record of PIRC Ltd19, over the last three years, in terms of its attendance, voting and engagement at the AGM’s of companies involved in fossil fuel extraction.
    – Similarly, what is the record of GMPF/and LAPFF prior to PIRC formally becoming the proxy (from October 2015 when we first asked the Fund to divest).
    Can the Fund provide a clear statement of the aims of engagement and the course of action to be followed when it fails?
    – Will the Fund respond to FFGM’s arguments against over-reliance on engagement to force industry change?

  3. Collective shareholder initiatives
    TPI: What are the Fund’s plans for making use of the information provided by TPI, including that from the promised revision of the methodology to include scope 3 emissions from fossil fuel companies?
    – WWF: Has the Fund tested its portfolio of investments against the Paris 2 degree scenario? Is a quantitative analysis of the results available?
    – How confident is the Fund that it has the management and research capacity to make informed, strategic decisions on the basis of the information provided by these initiatives and other sources such as Fossil Free Indexes Carbon 200 Underground and the Science-Based Target Initiative?

  4. Transparency
    – Could the Fund provide a quarterly report on its holdings, including information on sales and purchases of shares? This would enable the public to follow the course of the Fund’s decarbonisation strategy without the confusion entailed by changes in asset valuations.
    – The Fund has discussed its carbon footprint but this was under the Management Panel’s reserved business20. Will the Fund provide a public report on its carbon footprint, or at least a report on the possibility and difficulties of providing an accurate report?

  5. Divestment
    Why does GMPF think full divestment from the fossil fuel industry is a significant risk when published evidence refutes this and other big funds do not see it as a significant risk, having taken precisely this divestment action?

4Pensions & Investment Research Consultants http://www.pirc.co.uk/ Not to be confused with the other PIRC, the Public Interest Research Centre, http://publicinterest.org.uk/about/

8The Paris agreement in 2016, although a success in terms of gaining international participation and agreement, requires countries to make pledges for carbon reduction. Unfortunately, at present, these pledges commit the world to warming of at least 3 degrees. Moreover the 2 degree target an timescale relies on carbon extraction from the atmosphere for which no viable technology exists capable of deployment at the necessary scale.

12http://www.wwf.eu/?303711/Biggest-EU-investors-are-partly-aligned-with-Paris-Agreement-but-more-efforts-needed There is little public information available about the other initiative 50/50.

19Pensions & Investment Research Consultants http://www.pirc.co.uk/ Not to be confused with the other PIRC, the Public Interest Research Centre, http://publicinterest.org.uk/about/