27th July 2019

On 11 July, two representatives of Fossil Free Greater Manchester met with senior representatives of Greater Manchester Pension Fund and their advisors.  The meeting, which was scheduled at short notice, lasted just over an hour.  It was a constructive discussion in which both sides were able to present their thinking and arguments.  We have written to the Fund’s Chair, Tameside Council leader, Brenda Warrington, to summarise the meeting and present our responses, both those given at the meeting and also some additional points and information in response to arguments made by the Fund at the meeting. We have shared the letter with members of the Fund’s Management and Advisory panel, and a slightly edited version (replacing officers’ names with their roles) can be viewed HERE.

We concluded by thanking the Fund for their time and for a constructive discussion.  We went on,

“We do appreciate the complexities of decarbonising your investment portfolio and moving to a position where pensions are not dependent on an industry that has taken humanity to the edge of a precipice. We accept that you are moving in the right direction but we continue to assert, with evidence, that the speed of your decarbonisation is inadequate to the scale and urgency of the climate crisis, which as you all know is very much here and getting worse by the month.”
(emphasis added here)

The main areas discussed follow, with the key points of contention.

1. Decarbonisation plans and time line

The Fund confirmed that it plans to become carbon neutral by 2050. This is an inadequate response to the climate emergency.  It is not consistent either with the Greater Manchester net zero date of 2038, nor with the earlier date of 2030 which has been widely promoted as more in keeping with the urgency of the situation.  What these dates disguise is the need for massive reductions in greenhouse gas emissions immediately. 

The IPCC has noted that the world has no more than 11 years to make radical reductions to greenhouse gas emissions, the majority of which come from burning fossil fuels. The Fund did say that it anticipated decarbonising its investments before 2050 but claimed that the strategy needs time. 

We were alarmed to hear arguments that the Fund would become carbon neutral rather than carbon free. While there are likely to be continued residual emissions from some industrial sectors, the danger is that talk of carbon neutrality assumes continued, significant levels of fossil fuel emissions.  The problem is that no technology is available for mitigating continued carbon emissions at that scale,

The Fund confirmed that it is moving £2.3Bn from passive tracker funds to a low carbon actively managed fund.  We have requested more details.

2. Rationale for continued investment in Fossil Fuels and perceived risk of divestment.

It was pointed out to us that financial performance is paramount since this enables pensions to be paid without a cost to the employers. We do not disagree with this reality.

We argued that the evidence was that fossil stocks did no better over time than other stocks, citing the Grantham, Trinks et al studies1 and the two major Ex-Fossil Fuel indexes2. The Fund countered that they had calculated that the funds in fossil fuels gained them £400M over the last three years, which they would not have achieved had they divested. We would like you to show us how this figure was calculated and what it specifically refers to (i.e. methodology, period, including stocks examined and comparators), otherwise it is open to the charge of cherry-picking. Our own investigation of BP returns over the period 21 July 2016 to 21 July 2019, indicates that it underperformed3, as did Centrica4. Moreover, we note a) the higher volatility of fossil fuel stocks (so this could easily go the other way) and b) these stocks are vulnerable to passing the peak in demand leading to stranding and a sudden drop in values and returns.

Moreover, there are other investments that yield comparably higher returns and a balanced portfolio would inevitably have higher and lower performing holdings with corresponding spreads of risk. On reflection we feel that the higher yield argument is a (post hoc) rationalisation for an unethical investment portfolio.  We have asked to see the calculation so we can evaluate its validity.

3. Impact of divestment

GMPF challenged the idea that divestment would lead to good outcomes since other, less ethical investors would buy the shares; maybe those companies would not be challenging the boards of oil and gas companies. We pointed out that divestment is meant to a) remove the social license for continued fossil fuel extraction, b) it will eventually harm profits and stock valuation which in turn makes capital investment in exploration and new extraction harder for the fossil majors. As we noted, this seems to be the view of Shell’s CEO and also the Head of OPEC, both of whom have recently cited the divestment movement as a major threat5. There is also evidence that divestment decisions are harming stock values. While this has been largely a transient effect, it now seems likely that the impacts are becoming more sustained as the divestment movement builds up6. While the Fund argues that there could be a cost to employers (meaning cuts to services) were they to divest from fossil fuels, our concern is that, on the contrary, this is now more likely if the Fund keeps its fossil fuel investments.

4. Engagement

We pointed out that engagement, while relevant in many sectors has demonstrably not impacted on the carbon emissions from fossil fuel companies, only impacting on non-core areas such as disclosure and R & D, and that unevenly. Against all the evidence, GMPF’s advisors still feel that it is relevant, inexplicably citing resolutions made at Exxon and Chevron, both along with the Fund’s biggest holdings, Shell and BP, still spending tens of millions each year lobbying against climate action7, as examples of successful engagement. We pointed to the National Trust as a body that has chosen to divest because engagement has not worked.

The Fund’s advisors, PIRC Ltd., did take on board the need for objective setting, timelines and sanctions, so there can be transparency about engagement with companies. They said they were working on a framework for this. This is long overdue and would provide objective criteria to assess the effectiveness of engagement and help make the decision to exit from a company when it failed to respond. However, we reiterate, engagement will not change a company whose core business is fossil fuel extraction into something entirely different. It’s a bit like talking to a leopard in the hope that it will change its spots.

Moreover, engagement does not manage the risk to the Fund of having some 10% of its investments in the fossil fuel industry: putting all your eggs in the engagement basket is unnecessarily risky given the Fund’s fiduciary duty of ensuring that the ability to pay pensions is safeguarded.

5. Alternative Investments

It was stated that the Fund is constantly looking to source other investments but that it is difficult to find enough with decent yields and there is also strong and increasing competition (including Chinese investment that is “willing to pay anything”) so that  nvestment managers get outbid. They cited Clyde Wind Farm and Albion Community Renewables as successful investments in renewables. When we argued that the alternatives to fossil fuels do not have to be renewables they again cited the gain made in oil/gas over the rest of the portfolio (but see our critique, above)

The Fund stated that they are actively developing the renewables market / industry through partnership with other Pension Funds in GLIL Infrastructure LLP: however, this is not exclusively investing in renewables8. We noted what Friends of the Earth concluded when they reviewed the largest Funds: “The Fund is strong on low carbon investing, however this is countered by continued high investments in fossil fuel companies.”9

6. Just Transition

The Fund said they are working with the Investing in a Just Transition Initiative. We support the aims of ensuring a just and fair transition for all sectors of society, including those workers in the fossil fuel and related industries.  We  confirmed that we would like to receive an invitation to a planned workshop about this, although we would appreciate more room for discussion and the presentation of critically constructive perspectives than at the Fund’s first “engagement event” which was a one-sided presentation of arguments justifying the Fund’s approach.

Read the full letter HERE


3or the three-year period 21 July 2016 to 21 July 2019, BP returned an average annual rate (including reinvested dividends) of 9.72% which is below the rate of 10.74% achieved by CRBN, an ETF that tracks the MSCI ACWI Low Carbon Target Index (info on CRBN here: https://www.ishares.com/us/products/271054/ishares-msci-acwi-low-carbon-target-etf ).

4Whose own website https://www.centrica.com/investors/announcements-tools/share-price-tools/charting-comparison shows that for the same three-year period the total return end price was 116.36 versus a start price of roughly 238, which works out to about -21% annually.

9Risky business: Local government pension funds and the climate crisis.  How Local Government Pension Funds are failing to protect themselves from the financial risks of climate change.  Friends of the Earth, Friends of the Earth Scotland and Platform London.  2018.  Main report: https://drive.google.com/file/d/1cx4v4leHaFEF8vYwewycZRn3SRrzTqPk/view Appendix on GMPF: https://drive.google.com/file/d/1ly4kgvv_GkP-RRSD-xTS4wSHTEJbB9ME/view