Agenda item

A report of the Director of Finance was presented to provide Members with quarterly investment reports in respect of funds invested externally with Border to Coast Pensions Partnership Limited (Border to Coast) and with State Street Global Advisers (State Street).

As at 30 September 2020 the Fund had investments in:

●     the Border to Coast UK Listed Equity Fund, which had an active UK equity portfolio aiming to produce long term returns of at least 1% above the FTSE All Share index; and

●     the Border to Coast Overseas Developed Markets Equity Fund, which had an active overseas equity portfolio aiming to produce total returns of at least 1% above the total return of the benchmark (40% S&P 500, 30% FTSE Developed Europe ex UK, 20% FTSE Developed Asia Pacific ex Japan, 10% FTSE Japan).

For both sub-funds the return target was an annual amount, expected to be delivered over rolling 3 year periods, before calculation of the management fee. The Head of Pensions Governance and Investments reported that Border to Coast was performing well and meeting its target. Similarly State Street, which had a passive global equity portfolio invested across four different region tracking indices appropriate to each region, was also meeting its target.

The report highlighted that State Street had recently made changes to their passive benchmarks. State Street had advised investors in a number of its passively-invested funds, including the four State Street equity funds the Fund invested in, that it had decided to exclude UN Global Compact violators and controversial weapons companies from those funds and the indices they tracked. As this decision was taken by State Street in November, the performance information presented in the submitted report had not yet been impacted by this change.

State Street had produced a Q&A document (included at Appendix C to the submitted report), setting out more detail of the potential investment impact of the change to benchmarks. Overall approximately 37 out of 2000 companies in the Overseas State Street passive fund were excluded and they represented about 3.6% of the index by value. It was highlighted that the anticipated impact on the performance of these funds and the Fund's investments was not huge.

The approach State Street was taking to companies that they did not wish to invest in was to exclude these companies from the underlying benchmarks. As a passive investor, this was one of the few approaches available as passive investment typically requires holdings in all the main components of a particular stock market index.

Active equity investors, such as Border to Coast, were able to make decisions on which companies to hold or the weighting to apply to each company based on a wide range of factors, including responsible investment: Environmental, Social and Governance issues (ESG) and the likely impact of those issues on the financial performance of that company. The Senior Portfolio Manager from Border to Coast provided a summary of Border to Coast's approach, the essence of which was to take a forward-looking view and anticipate changes to corporate behaviour, policies and approach. Border to Coast was reliant on a number of different data inputs and tried to get a broad source of inputs, as well as taking account of more qualitative and wide ranging ESG inputs. Border to Coast also tried to influence corporate behaviour through engagement.

In response to a Members' question, the Head of Pensions Governance and Investment commented that discussion had recently taken place with Border to Coast in relation to whether tobacco exclusion was something that should be reconsidered collectively. Although at the current time the majority of the Funds in Border to Coast would probably not agree to a tobacco exclusion, there was nothing to prevent this proposal being given further consideration and it remained on the agenda.

In relation to feedback from companies that had been excluded, the Head of Pensions Governance and Investment explained that it would take some time for this to happen but the ultimate aim was for companies to change their behaviour. It was suggested by the Investment Advisor that engagement was a better route than exclusion as it delivered better outcomes.

The Head of Pensions Governance and Investment highlighted that the Fund did not normally invest in passive funds and the aim, as previously discussed by the Committee, was ultimately to move funds from State Street into Border to Coast.

ORDERED that the report was received and noted.