Agenda item

A report of the Interim Director of Finance was presented to advise the Committee of recent changes made by Border to Coast Pensions Partnership Limited (‘Border to Coast’) to its Responsible Investment Policy, Corporate Governance & Voting Guidelines and Climate Change Policy.

 

This year’s RI Policy review reflected suggested improvements from Robeco and work undertaken during the year; including on Border to Coast’s Net Zero commitment.

 

Amendments had been made to all the sections for integrating RI into investment decisions. This was due to continuing to develop and embed ESG into investment decision making, the impact Border to Coast’s Net Zero commitment and progress made on Real Estate ahead of launch.

 

The wording on human rights had been expanded to include how Border to Coast would engage.

 

An area continuing to gain focus from an investment perspective was biodiversity.  Border to Coast was currently engaging on biodiversity issues through its support of the Investor Policy Dialogue on Deforestation Initiative (IPDD), through Robeco and as part of a Waste and Water theme and its engagement on climate change.  Therefore, a high-level overview had been inserted into the RI Policy which covered Border to Coast’s approach to engagement.

 

As part of the annual review the approach to exclusions had been revisited. When considering any exclusions, Border to Coast considered the associated material financial risk of a company’s business operations and whether they had concerns about its long term viability. This included considering key financial risks and the likelihood of success through engagement in influencing company strategy and behaviour.  Border to Coast also assessed the impact on the investible universe and the benchmarks its portfolios were measured against.

 

To support Border to Coast’s Net Zero and to send a clear signal on intentions, the recommendation was to reduce the exclusion thresholds to 25% for thermal coal and oil sand production (aligned with illiquid assets).

 

An exclusion related to thermal coal power generation had been introduced with a revenue threshold of 50% for developed markets.  A higher threshold of 70% had been introduced for emerging markets to reflect support of a just transition and recognition that countries had differing transition timelines and dependencies on coal and the potential impact on energy availability and economic development.

 

The exclusion for controversial weapons had been broadened to cover landmines, biological and chemical weapons.  This covered international treaties and conventions relating to controversial weapons that the UK had either ratified or is a state party to.

 

The exclusions in place took into account material financial factors and were limited to areas where it was important to give explicit indications to the investment decision makers.

 

The changes to the exclusions approach were not expected to lead to any significant changes to Border to Coast’s existing investment portfolios as these risks were already reflected in the investment decision making process.  Partner Funds would be able to assess this through performance versus respective benchmarks for the investment funds.  This was an area Border to Coast would continue to engage with Partner Funds as to how it developed over time.

 

The proposed amendments to the RI policy and Border to Coast’s rationale for these changes were listed in a table at paragraph 5.11 of the submitted report.

 

The Voting Guidelines had been reviewed by Robeco considering best practice.  Asset owner and asset manager voting policies and the Investment Association Shareholder Priorities for 2023 were also used in the review process. There were several minor amendments and proposed additions covering diversity and climate change.

 

Border to Coast’s voting stance in relation to diversity representation at board level, for both gender and ethnicity, had been strengthened this year. This was to reflect the Financial Conduct Authority’s listing rules and also expectations of FTSE 250 companies to be meeting the Parker Review recommendations.

 

Border to Coast had further strengthened its approach to climate-related voting and would now include a fifth Climate Action 100+ (CA100+) Net Zero Benchmark indicator covering a company’s decarbonisation strategy. They were also adding the Urgewald Global Coal Exit List to the industry benchmarks (A100+, Transition Pathway Initiative) used to assess whether companies were making sufficient progress.

 

Proposed amendments to the Corporate Governance & Voting Guidelines were highlighted in the table at paragraph 6.4 of the submitted report.

 

The Climate Change Policy had been reviewed by Robeco and against asset managers and asset owners to determine developments across the industry.  The climate change approaches of the other seven LGPS pools had also been reviewed. 

 

The main changes reflected the work undertaken to support Border to Coast’s Net Zero commitment and were as follows:

 

Additional wording had been added about why climate change was important to Border to Coast as an investor. This included reference to the role Border to Coast needed to play through engagement and the investment opportunities for investors and how this would support Partner Funds.

 

Reference to Border to Coast’s Net Zero targets had been included in the ‘Our ambition – Net Zero section’ with detail on the specific targets for carbon reduction alignment and engagement.  This had been moved from a later section of the policy.

 

A paragraph had been included on how Border to Coast has considered the different climate scenarios available, those which they will be using and the limitations and associated risks of climate modelling.

 

Border to Coast’s approach to exclusions had been updated in line with the RI Policy with the lower revenue thresholds for public market companies for thermal coal and oils sands production (now aligned with illiquid assets) and the introduction of an exclusion for thermal coal power generation.

 

Additional wording had been added on the importance of engagement in meeting Border to Coast’s Net Zero goal and the targets they had set.  The focus actions for the next and subsequent years had been updated which included their voting approach to ‘Say on Climate’ resolutions and climate-related shareholder resolutions.

 

The amendments to the Climate Change Policy were highlighted in the table

at paragraph 7.8 of the submitted report.

 

Border to Coast would continue to work with its Partner Funds to develop and update its approach to Responsible Investment (including Climate Change) and Corporate Governance.

 

ORDERED as follows that:

1.         the information was received and noted.

2.         the revised Border to Coast documents that were included as Appendices A, B and C to the submitted report were approved.