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Nottinghamshire Pension Fund:

Divest! Invest!

The case for divestment from fossil

fuels and investment in the green and

local economies

Extinction Rebellion Nottingham Briefing

December 2019

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Fossil fuel investments are financially risky and environmentally and socially damaging. Mainstream investment opportunities which exclude fossil fuel companies offer returns which are at least comparable to those which do not.

Fossil fuel investments therefore bring risks but no additional returns. By holding them Nottinghamshire Pension Fund is failing in its fiduciary duty towards members.

In place of holding shares in fossil fuel companies, the Pension Fund should make investments which are sustainable and help to mitigate climate change. There is also potential for increasing local green investments, which would benefit Nottinghamshire’s people, economy and environment.

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Briefing Paper Contents Executive Summary ................................................................................................................................. 4

Introduction ............................................................................................................................................ 8

What is divestment? What is positive investment? ............................................................................... 8

Divestment trends worldwide ................................................................................................................ 8

Nottinghamshire Pension Fund .............................................................................................................. 9

Fund value and members ................................................................................................................... 9

Fund governance................................................................................................................................. 9

LGPS Central: Pension Fund pooling across the Midlands region ...................................................... 9

Fund holdings in fossil fuel companies ............................................................................................. 10

Responsible investment and the Fund ............................................................................................. 10

The case for divestment and for positive alternative investments ...................................................... 11

1. Investments in fossil fuel companies are investments in climate change .................................... 11

2. Investments in fossil fuel companies are increasingly financially risky ........................................ 12

3. Fossil fuel investments are a major financial risk to member employer organisations ............... 14

4. Share-holder engagement with fossil fuel companies will not change their business models .... 14

5. Cleaner investment funds are available, or can be developed, offering similar or better financial

returns ............................................................................................................................................... 17

6. Investments can be made which bring economic, social and environmental benefits to

Nottinghamshire ............................................................................................................................... 20

Extinction Rebellion Nottingham demands .......................................................................................... 22

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Executive Summary

This paper has been prepared by Extinction Rebellion Nottingham to set out the case for divestment

by Nottinghamshire Pension Fund from its current holdings in fossil fuel companies, and investment

in cleaner alternatives, including local investments.

A key finding is that the financial risks which fossil fuel investments represent to the value of the

Fund and the comparable or perhaps superior returns offered by fossil-free investments mean

that the Pension Fund is currently failing in its fiduciary duty towards its individual and employer

members.

Nottinghamshire Pension Fund

The Nottinghamshire Pension Fund has a value of around £5bn, with around 330 contributing

employers and 47,000 contributing members. Contributing employers include all nine Local

Authorities within the Nottingham and Nottinghamshire area, Nottingham Trent University,

Nottingham City Transport, local social housing providers, local education institutions, Citizens

Advice branches and other local advice organisations, and other local third sector organisations.

The Pension Fund is administered by Nottinghamshire County Council, and overseen by the Pension

Fund Committee, comprised mainly of County Councillors in addition to other Local Authority, union

and pensioner representatives.

The majority of the Fund’s investments are in shares of stock-market listed companies. The latest

published holdings (as at 30 September 2019) showed that the Fund directly held around £154m in

fossil fuel company shares1. Most of the shares now held by the Fund are in funds managed by

external companies, which invest in a range of shares across stock market indexes. The majority of

these are in ‘passive’ funds which are linked to particular stock market indexes which contain a

portfolio of shares. A smaller amount is in ‘active’ funds, where the fund manager buys and sells

constituent shares more actively, meaning a more dynamically changing portfolio. Information on

the constituent shares in passive holdings is available online, though it is not straightforward to find

or to calculate the value of fossil fuel holdings within them. Active fund holdings are less

transparent. Based on our calculations we estimate the total fossil fuel holdings of the Pension Fund

to be around £250m2.

The Pension Fund has recently taken the decision to increase its infrastructure investments from 5%

to 8% of total fund value. Some infrastructure investments are in clean energy3. In correspondence

with Extinction Rebellion Nottingham the Fund has said it does not know what proportion of its

other infrastructure investments are in clean energy, or whether some investments may in fact be

high carbon, for example in fossil fuel power stations or transmission infrastructure.

The Pension Fund is in the process of integrating with LGPS Central, a company which will oversee

the management of the pooled assets of nine Midlands-based local government pension schemes, of

which the Fund is one. This integration is still taking place. Individual member Funds such as

1 Equity holdings at 30.09.19 https://www.nottinghamshire.gov.uk/media/2324589/2019-20-q2-equities.pdf

2 See footnote 14 (page 8) for an explanation of these estimates.

3 See list of infrastructure investments, containing investments in several green or renewable energy funds,

plus Langar Lane solar farm: https://www.nottspf.org.uk/media/2324590/2019-20-q2-infra.pdf

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Nottinghamshire remain responsible for their own investment strategy, thereby maintaining the

power to decide on whether to divest from particular stocks. They also have the opportunity to

invest in a number of investment funds offered through the LGPS Central pool.

Divest/Invest

Globally, almost 1,200 institutions, with an estimated total value of $14.09trillion, have committed

to full or partial divestment from fossil fuel investments. These include around 160 pension funds4.

The case for divestment of Nottinghamshire Pension Fund from fossil fuels, and for investment in

clean and potentially local alternatives, is as follows:

Investments in fossil fuel companies are investments in products which cause climate change. These investments run contrary to the climate change mitigation policies of many employer member organisations of the Pension Fund. Increased atmospheric concentrations of greenhouse gases have dramatically increased the likelihoods of many of the extreme weather events we have seen over the last 20 years5. Climate change has been found to directly cause 400,000 deaths each year, while the fossil fuel economy causes an additional 4.5m deaths each year through air pollution, hazardous occupations and cancer6.

Investments in fossil fuel companies are increasingly financially risky. International efforts to reduce carbon emissions to prevent catastrophic climate change mean that the majority of known fossil fuel reserves cannot be exploited and must be left ‘in the ground’7. The market value of fossil fuel companies is based largely on the notion that all known reserves can be exploited. Understanding that they cannot be is growing quickly, and the point fast approaching where most reserves will be rendered valueless – becoming ‘stranded assets’. At this point there will a large reduction in the share price of fossil fuel companies and a corresponding reduction in the value of the Pension Fund. The UN Principles for Responsible Investment initiative recently forecast that the ten biggest oil and gas companies in the world – which include Shell, BP, ExxonMobil, Chevron and ConocoPhilips, all of whom the Pension Fund have investments in - will lose on average 31% of their stock market value by 2025 due to forthcoming changes in climate change policy around the world8.

Fossil fuel investments are a major financial risk to member employer organisations. The Nottinghamshire Pension Fund is underwritten by its member employer organisations. The financial risks of fossil fuel investments are therefore borne by these organisations.

Share-holder engagement with fossil fuel companies will not change their fundamental business models. The Pension Fund attempts to improve corporate behaviour by engaging with the companies it invests in. This is not resulting in significant change in the strategies of fossil fuel companies. No fossil fuel companies show signs of a radical shift to becoming solely, or even predominantly, renewable energy companies, or have adequate carbon reduction targets. Most do not even measure carbon emissions from the products they sell. The Pension Fund’s claim to be pushing fossil fuel companies as hard as it can to reduce emissions is undermined by their voting record at the 2019 AGMs of Shell and BP, where

4 Data updated at 09.02.2020, from https://gofossilfree.org/divestment/commitments/

5 https://www.carbonbrief.org/mapped-how-climate-change-affects-extreme-weather-around-the-world

6 DARA Climate Vulnerability Monitor 2012 https://daraint.org/climate-vulnerability-monitor/climate-

vulnerability-monitor-2012/findings/ 7 See https://www.ucl.ac.uk/news/2015/jan/which-fossil-fuels-must-remain-ground-limit-global-warming

8 https://www.unpri.org/inevitable-policy-response/forecast-policy-scenario-equity-markets-

impacts/5191.article.

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they chose to abstain on key votes which would force the companies to reduce their emissions at a far more rapid rate9.

Other investments are possible: Share indexes developed by FTSE and others which exclude fossil fuel stocks offer returns at least comparable to those which do not, while avoiding the financial risks of fossil fuel assets. Investment funds based on these share indexes may already be available or could be developed on behalf of the Pension Fund. Meanwhile, Southwark local authority pension fund in London has taken its first divestment steps by committing 20% of its value to low carbon investments, a strategy which Nottinghamshire could follow. The Environment Agency Pension Fund has almost completely divested from fossil fuels over the last five years by changing its investments10. Further, an ‘active’ Sustainable Equities fund managed on behalf of LGPS Central is now available for the Pension Fund to invest in. To date it has not done so. Other fossil free active funds are also available.

Local investments could be made which bring economic, social and environmental benefits to Nottinghamshire. There is great potential for investigation by the Pension Fund of opportunities for making local investments in sustainable projects. Some of the Fund’s investments could therefore be positive ones for the people of Nottingham and Nottinghamshire, rather than investments in global corporations causing ecological and social breakdown. Local investments would help achieve the climate change mitigation targets of many of the Fund’s employer members, particularly Local Authorities.

Extinction Rebellion Nottingham Demands

In light of the information set out and the imperative nature of action on climate change, Extinction

Rebellion Nottingham calls on Nottinghamshire Pension Fund to:

Declare a target to divest from all fossil fuel-related assets within the next three years.

Publish an audit of all investments to give Pension Fund members and the public information

on the level of climate risk the Pension Fund is at. This would include the current level of

fossil fuel equity investments, and the levels of infrastructure investments in both low- and

high-carbon projects.

Produce and implement a plan for divestment and the alternative investments which will be

made. To include:

o As soon as possible, investment in the LGPS Central sustainable equities fund as well

as other fossil-free active funds. The level of such investments should increase over

the three year period, replacing active fund investments containing fossil stocks.

o As soon as possible, increase direct investments in equity of stock market-listed

renewable energy companies and other sustainable companies producing products

which benefit environmental sustainability. The level of such investments should

increase over the three year period, replacing direct investments in fossil fuel

companies.

9 More on the business strategies of BP and Shell and the Pension Fund’s voting record can be found in XR

Nottingham’s BP and Shell briefing document, at: https://divestment.xrnottingham.org/XRNottsPensionFundBPAndShellBriefingDocumentJan2020.pdf 10

See https://www.eapf.org.uk/investments/climate-change/tackling-climate-risk

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o Progressive increases in clean infrastructure investments and decreases in

investment in funds which finance high carbon infrastructure.

o As soon as possible, investigation of opportunities for investments in passive equity

funds based on indexes which exclude fossil fuels.

o Investment in these fossil-free equity funds. Over the three year period such

investments to progressively replace investments in funds which include fossil fuel

equities.

o Investigation of new local investment opportunities which bring social and

environmental benefits. This may include opportunities for investment in employer

members’ own sustainable projects.

o Investment in viable local projects.

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Introduction Current investments by Nottinghamshire Pension Fund11 in fossil fuel companies carry great financial

risks for individual and employer members. They are also investments in climate change, which is

causing mounting ecological and social damage that will in turn have deleterious effects on the

wider economy.

These financial risks and the comparable or perhaps superior returns offered by fossil-free

investments lead us to conclude that the Pension Fund is currently failing in its fiduciary duty

towards its individual and employer members.

This paper sets out:

What ‘divestment’ from fossil fuels means, and where money can be invested instead

Divestment trends worldwide

The Fund’s membership, governance and investments

The case for divestment and for positive alternative investments

Extinction Rebellion Nottingham’s demands

The section on the case for divestment and alternative investments is set out in six distinct

arguments. For each one an initial summary paragraph gives an overview.

What is divestment? What is positive investment? Divestment is the opposite of investment. It refers to getting rid of stocks, bonds, or investment

funds. Divestment polices, such as those aimed at the apartheid regime in South Africa in the 1980s,

are often adopted for ethical reasons. The case for divestment from fossil fuel stocks is, however,

multi-faceted, and goes a long way beyond ‘ethical’ arguments to encompass financial risk and the

demonstrable economic, social and environmental destruction caused by climate change.

The case for positive, sustainable investments in the green and local economies proceeds from the

same reasons. Investments may be in large companies developing sustainable products, in stock

market-linked sustainable investment funds, or in projects and companies bringing local economic,

social and environmental benefits.

Divestment trends worldwide Globally, almost 1,200 institutions, with an estimated total value of $14.09trillion, have committed

to full or partial divestment from fossil fuel investments. These include around 160 pension funds.

Eight UK Pension Funds have committed to full or partial divestment, including commitments to full

divestment by Southwark, Cardiff City, Monmouthshire and Waltham Forest local authority funds12.

The Environment Agency Pension Fund has also almost completely divested. Over 160 UK

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Also referred to in this paper as ‘the Pension Fund’ and ‘the Fund’. 12

All data correct as at 09.02.2020 https://gofossilfree.org/divestment/commitments/

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institutions have committed to full or partial divestment, including the University of Nottingham,

which has committed to full divestment.

Nottinghamshire Pension Fund

Fund value and members The Nottinghamshire Pension Fund holds assets to the value of around £5bn. As at March 2018

around 70% of the fund value was held in equities (also referred to in this paper as ‘shares’ or

‘stocks’), around 13.5% in property and the remainder in bonds and cash.

The fund has around 330 contributing employers and 47,000 contributing members. It is

administered by Nottinghamshire County Council for the Local Government Pension Scheme13.

Fund governance The Nottinghamshire Pension Fund Committee provides a scrutiny role and consists of nine County

Councillors, three City Councillors, two representatives of the Nottinghamshire Local Authorities

Association (representing district councils), two trade union representatives and two pensioner

members. The County Councillors are voting members, while the other members are non-voting.

The Local Pension Board provides a further scrutiny role. From the County Council website: “The County Council has set up the Local Pension Board to ensure that the pension scheme is properly run. In formal terms, the Board assists the County Council to secure compliance with pension legislation, and ensures the effective and efficient governance and administration of the pension scheme”.14

The Board has eight members. Four members represent employers in the pension scheme, and four represent scheme members.

LGPS Central: Pension Fund pooling across the Midlands region The Nottinghamshire Pension Fund is in the process of integrating with LGPS Central, a company

which will oversee the management of the pooled assets of nine Midlands-based local government

pension schemes, of which the Fund is one. This integration is still taking place. Individual member

Funds will remain responsible for their own investment strategy, thereby maintaining the power to

decide whether to divest from particular stocks. They will also have the opportunity to invest in a

number of investment funds offered through the Central pool. One of these funds, offered through

West Midlands Pension Fund – another of the nine members – will be discussed below.

13

Information from 2017-18 Annual Report https://www.nottinghamshire.gov.uk/media/1529118/annual-report-2017-18.pdf 14

https://www.nottinghamshire.gov.uk/npf/about-the-fund/local-pension-board

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Fund holdings in fossil fuel companies In its latest list of holdings (as at 30 September 201915) the Fund directly held around £154m of

individual shares in fossil fuel companies – mainly Royal Dutch Shell and BP, plus Rio Tinto and BHP

Group (both of which have major coal mining interests).

Most of the Fund’s shares are, however, held in funds managed by external companies (called

‘Pooled Equities’ in the list of equity holdings - see footnote 13 above).

The majority of these are in ‘passive’ funds which are linked to particular stock market indexes which

contain a portfolio of shares. A smaller amount is in ‘active’ funds, where the fund manager buys

and sells constituent shares more actively, meaning a more dynamically changing portfolio.

Information on the constituent shares in passive holdings is available online, though it is not

straightforward to find or to calculate the value of fossil fuel holdings within them. Active fund

holdings are less transparent.

Based on our calculations we estimate the total fossil fuel holdings of the Pension Fund to be around

£250m16.

Responsible investment and the Fund

A presentation in November 2018 to the Fund’s Working Party by its advisors on Responsible

Investment highlighted the following:

The Fund has a legal duty to act as a responsible investor

It has a legal duty to invest in a sustainable way

The Fund may choose to invest/divest for ‘non-financial’ reasons, i.e. for reasons other than

financial return. These include ethical reasons, local investments, or impact investing

(investments with a socially or environmentally beneficial outcome). Two tests need to be

passed for these investments: that there is no significant financial detriment to the Fund,

and that decisions around these investments have support amongst the Fund membership.

The issue of climate change has become an increasingly pertinent one for institutional investors over

recent years. It is clear that it is given special mention as a consideration for pension funds within

Nottinghamshire Pension Fund and LGPS Central documents.

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Equity holdings at 30.09.19 https://www.nottinghamshire.gov.uk/media/2324589/2019-20-q2-equities.pdf 16

This is calculated using the equity holdings as at 30.09.19 (see footnote 14). The total value of direct holdings in BP, Shell, BHP Group and Rio Tinto is around £154m. Investigation of fossil fuel holdings within passive Pooled Equities (managed funds) which track UK equity indexes showed an additional exposure to Shell of around £43m and to BP of around £24m. Through investments in funds which track US share indexes smaller amounts are held in ExxonMobil, Chevron, ConocoPhilips and TC Group (formerly TransCanada). As noted above, active fund holdings are less transparent and are not included in the calculation.

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At present both the Fund and LGPS Central favour an ‘engagement’ strategy with fossil fuel

companies, holding shares in them and attempting through meetings and – particularly - voting at

corporate AGMs to encourage them to reduce their emissions, rather than divesting from holdings in

these companies. The Pension Fund Chair’s foreword to the Fund’s Annual Report 2017/18 says

“[The] engagement approach continues to highlight and improve the resilience of corporate

strategies at global resource companies in the wake of climate change agreements”17.

The Pension Fund has recently taken the decision to increase its infrastructure investments from 5%

to 8% of total fund value, to include additional investments in ‘clean energy assets’. The Fund has

invested in Nottinghamshire Community Energy to help finance the Langar Solar Farm, as well as in

several clean or renewable infrastructure funds18.

In recent correspondence with Extinction Rebellion Nottingham the Fund has said it does not

measure the carbon footprint of its infrastructure investments. It said it does not know what

proportion of its other infrastructure investments are in clean energy or other sustainable projects.

It also said it does not know whether some of its infrastructure investments are funding high carbon

projects such as fossil fuel transmission or power generation.

The Fund also has a local investment fund. However, it appears that investment in low carbon

projects is not a strong priority for it.

The case for divestment and for positive alternative investments

1. Investments in fossil fuel companies are investments in climate change Climate change is already resulting in hundreds of thousands of deaths around the world each year, while in addition the fossil fuel economy itself results in far more. Increased greenhouse gas concentrations in the atmosphere have been found to have dramatically increased the likelihood of many of the extreme weather events we have already seen, and these will only increase further in the future.

Many of the Fund’s employer members have carbon reduction policies as part of climate change mitigation strategies. The Pension Fund’s fossil fuel investments run contrary to these policies. These employer members include Local Authorities, Nottingham City Homes, Nottingham City Transport and Nottingham Trent University.

Owning shares in fossil fuel companies provides those companies with capital for the extraction, processing and sale of oil, gas and coal products. As conventional reserves are used up, oil and gas extraction in the form of non-conventional methods such as tar sands and fracking is increasingly locally environmentally destructive.

Climate change resulting from the burning of fossil fuels has been found to directly cause 400,000 deaths each year, while the fossil fuel economy causes an additional 4.5m deaths each year through

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https://www.nottinghamshire.gov.uk/media/1529118/annual-report-2017-18.pdf 18

List of infrastructure investments as at 30 September 2019: https://www.nottspf.org.uk/media/2324590/2019-20-q2-infra.pdf

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air pollution, hazardous occupations and cancer19. Scientific analyses known as climate attribution studies show the role of climate change in many of the extreme weather events of the last 20 years20. These include major floods in the UK in the year 2000, the 2003 heatwave, and the 2018 heatwave affecting the UK and Europe.

A full scientific assessment of the 2018 heatwave found that “it could not have occurred without human induced climate change”21.

The UK Climate Projections 2018, produced by the Met Office, found that the chance of such a heatwave occurring in any given year could increase to around 50% by 2050, just 30 years’ time22.

Many employer members of the Fund aim to reduce their carbon emissions as part of attempts to mitigate global climate change, while some Nottinghamshire Local Authorities also aim to reduce emissions from their area as a whole. Important progress has been made in meeting these aims. The Pension Fund’s investments in fossil fuel companies run directly contrary to this.

2. Investments in fossil fuel companies are increasingly financially risky Every country in the world has set carbon reduction goals and is currently in the process of

reviewing them with a view to increasing their ambition in order to meet the targets of the Paris

Agreement23. The UN Framework Convention on Climate Change Conference of Parties meeting in

2020 will bring these pledges together. Analysis shows that the majority of known fossil fuel

reserves must be left ‘in the ground’ if we are to achieve reductions in carbon emissions which

give us a reasonable chance of meeting the Paris targets. This will make most of the reserves

owned by fossil fuel companies valueless ‘stranded assets’24. The share price of fossil fuel

companies will fall accordingly, affecting the value of the Pension Fund.

A 2015 study by University College London’s Institute for Sustainable Resources, published in Nature,

showed that over 80% of coal, 50% of gas and 30% of oil reserves are "unburnable" if global warming

is to be limited to 2°C25.

The internationally recognised definition of ‘safe’ global temperature rise, and the aspirational goal

of the Paris Agreement on climate change, is a rise of no more than 1.5 degrees, meaning that these

proportions of unusable fossil fuel reserves are in fact even higher. Two degrees of warming is now

recognised as bringing catastrophic impacts26.

19

DARA Climate Vulnerability Monitor 2012 https://daraint.org/climate-vulnerability-monitor/climate-vulnerability-monitor-2012/findings/ 20

https://www.carbonbrief.org/mapped-how-climate-change-affects-extreme-weather-around-the-world 21

https://www.carbonbrief.org/northern-hemispheres-extreme-heatwave-in-2018-impossible-without-climate-change 22

See ‘headline findings’ at https://www.metoffice.gov.uk/research/collaboration/ukcp 23

For example, the UK Government has recently committed to the goal of the country having net zero emissions by 2050, putting pressure on others to follow suit https://www.bbc.co.uk/news/science-environment-48596775 24 See https://www.ftse.com/products/downloads/FTSE_Stranded_Assets.pdf for a guide to stranded fossil

fuel assets produced by FTSE. 25

See https://www.ucl.ac.uk/news/2015/jan/which-fossil-fuels-must-remain-ground-limit-global-warming 26

See IPCC Special Report on Climate change of 1.5 Degrees https://www.ipcc.ch/sr15/chapter/summary-for-policy-makers/

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The Governor of the Bank of England, Mark Carney, has warned repeatedly about the prospect of

fossil fuel reserves becoming valueless ‘stranded assets’, with resulting major reductions in the value

of fossil fuel equities27 28.

In 2020 all governments will meet at the Conference of Parties to the UN Framework Convention on

Climate Change. Under the Paris Agreement’s ‘ratchet mechanism’, the expressed goal of this

meeting is for each country to pledge to meet far more ambitious carbon reduction goals than they

currently have, in alignment with the 1.5 degree target.

At this point, it would become clear that most fossil fuel reserves cannot be exploited and the

market value of fossil fuel companies could fall dramatically.

This is a very real risk to the financial performance of the Fund. Given that the Pension Fund is a

defined benefit scheme underwritten by member employers it is also a major financial risk to those

employer organisations (see section 3 below).

A 2014 analysis by the European financial services research and advisory firm Kepler Cheuvreux

looked at losses to the fossil fuel industry from stranded assets if national targets aligned with

limiting global warming to 2°C were adopted. (As noted above 2°C is no longer regarded as a ‘safe’

level of warming.) Even in this case it was found that the fossil fuel industry would lose $28 trillion in

revenues over two decades29. An estimate of $33trn losses over 25 years resulting from ‘climate

change policies’ was made in 2016 by a Barclay Plc energy analyst30.

In December 2019 the UN’s Principles for Responsible Investment initiative issued forecasts based

on what they call the ‘Inevitable Policy Response’ to climate change. The report said that markets

are systematically under-pricing climate risk and that inevitable increases in carbon cutting ambition

internationally will result in the ten largest oil and gas companies by market capitalisation will lose

on average 31% of their value by 202531. These companies include BP, Shell, ExxonMobil, Chevron

and ConocoPhilips, all of which the Pension Fund has investments in.

In January 2020 the Carbon Tracker Initiative predicted that value destruction in the oil and gas

industry will be higher the longer the delay in the introduction of more ambitious carbon cutting

policies, or if new policies are not properly anticipated32. This is because during the delay oil and gas

companies will continue to make capital investment in exploration and production infrastructure

which will become redundant when emissions limits are tightened.

All of these reports point to diminishing prospects for the fossil fuel industry, as well as potential

huge volatility in stock prices.

27

For example, see https://www.bbc.co.uk/news/business-50868717 28

The Bank of England and other Central Banks are working to highlight and manage the financial risks of climate change. Particular pressure is being placed on the banking and insurance sectors to contribute to the transition to a green and low-carbon economy. https://www.bankofengland.co.uk/climate-change 29

Kepler Cheuvreux: Stranded Assets, Fossilised Revenues, 2014 https://www.keplercheuvreux.com/pdf/research/eg_eg_253208.pdf 30

http://www.sustainabilityoutlook.in/news/fossil-fuel-industry-risks-losing-33-trillion-climate-change-756923 31

https://www.unpri.org/inevitable-policy-response/forecast-policy-scenario-equity-markets-impacts/5191.article 32

https://www.carbontracker.org/delays-to-global-climate-action-could-halve-value-of-new-oil-projects/

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A Friends of the Earth report in November 2018 analysed the action that 19 large local authority pension funds are taking to address the financial risks of climate change. Nottinghamshire Pension Fund came in the bottom category of 'laggard'. The report says Nottinghamshire is taking almost no action to protect members' funds and that "their failure to act is a breach of their fiduciary duty"33.

3. Fossil fuel investments are a major financial risk to member employer organisations

The Nottinghamshire Pension Fund is underwritten by its member employer organisations. The

financial risks of fossil fuel investments are therefore borne by these organisations.

At the 2018 AGM of the Fund, an individual member asked a question about the financial risks of

stranded assets. The answer given was that “All pension fund members can be reassured that their

pensions are not at risk. The LGPS is a defined benefit scheme and benefits are funded by employers

and not dependent on the performance of investments”34.

It would therefore be member employers who would bear the financial costs of a major reduction in

fossil fuel equity value. Continuing investment in fossil fuels therefore constitutes a major financial

risk to employer organisations. As such it represents a risk to their services users, employees, and -

in the case of Local Authorities - Council Tax payers.

It is worth noting that at its last valuation in 2016, the Fund had a deficit of £621m. Employer

organisations are being surcharged over the next 20 years to make up this deficit35.

4. Share-holder engagement with fossil fuel companies will not change

their business models Both the Nottinghamshire Pension Fund and LGPS Central currently pursue an ‘engagement’

strategy, using meetings and voting to attempt to modify the behaviour of the companies they

invest in. This strategy is not bringing meaningful change in the investments and business

strategies of fossil fuel companies at anything like the speed required to meet emissions

reductions that will prevent catastrophic climate change. No companies show any signs of a major

shift towards becoming solely – or even predominantly - renewable energy companies. Meanwhile

a study highlighted by LGPS Central itself showed that most major fossil fuel companies do not

even measure the emissions generated by the burning of the products they sell.

The Pension Fund directly holds shares in several fossil fuel companies, including Royal Dutch Shell and BP. Through pooled fund investments overseen by external companies it has further investments in Shell and BP, as well as in US majors including ExxonMobil, Chevron and ConocoPhilips.

33

https://cdn.friendsoftheearth.uk/sites/default/files/downloads/Risky-Business-LG-Pension-Funds-Climate-Crisis.pdf 34

See record of 2018 AGM questions: https://www.nottspf.org.uk/media/1530509/agm-questions.pdf 35

See 2017-18 Annual Report ps 13, 20 & 43 https://www.nottinghamshire.gov.uk/media/1529118/annual-report-2017-18.pdf

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The case of Royal Dutch Shell - seen as the ‘best’ of the fossil fuel companies on reducing emissions – helps to show how little ambition there is in the fossil fuel industry for addressing climate change. Shell has recently pledged to reduce its ‘Scope 3’ emissions (those from the burning of the fossil fuel products it sells). It says: "We intend to cut the carbon intensity of the energy products we sell, in step with society as it moves towards the goal of the Paris Agreement. That means fewer greenhouse gases emitted on average with each unit of energy we sell – by around 20% by 2035 and by around half by 2050."36 However, Shell also aims to sell more energy in the future than it does now. This means that their target amounts to a less than 50% reduction in their emissions by 2050.

As discussed above, the UN’s Intergovernmental Panel on Climate Change says that to have a reasonable chance of avoiding catastrophic impacts we must limit temperature rise to no more than 1.5°C. To achieve this we must reduce global emissions by 45% by 2030, and to net zero around 205037. Shell’s plans for a less than 50% emissions reduction by 2050 are completely out of step with the requited ambition. Indeed, their information (see footnote 35) does not specifically mention the 1.5°C goal. It is clear the company continues to look both ways on climate change and fossil fuels.

The Pension Fund also has major holdings in BP. BP is a far worse performer than Shell. It only reports on its operational emissions38. It says it cannot limit Scope 3 emissions as they are beyond its control. A recent shareholder resolution to make it do so was rejected39. Further analysis relating to Shell and BP can be found in XR Nottingham’s accompanying briefing paper on the Pension Fund’s investments in these two companies40. This includes examination of the voting records of the Pension Fund at both companies’ 2019 AGMs, where the Fund opted to abstain on resolutions which would have forced both BP and Shell to adhere to much tighter emissions targets.

As part of its engagement strategy, LGPS Central – the pool of nine Midlands-based pension funds of

which Nottinghamshire Pension Fund is one - works with the Transition Pathway Initiative (TPI). In

November 2018 TPI released a discussion paper on the oil and gas sector, looking particularly at

whether its constituent companies can transition their businesses in alignment with the Paris

Agreement on Climate Change41.

The paper looked at ten companies – which included Shell and BP - and found the following:

That none of the ten companies disclosed emissions from the burning of the oil and gas

products that they sell.

36

https://www.shell.com/energy-and-innovation/the-energy-future/what-is-shells-net-carbon-footprint-ambition.html 37

https://www.ipcc.ch/sr15/chapter/summary-for-policy-makers/ 38

https://www.bp.com/en/global/corporate/sustainability/climate-change/reducing-emissions/our-ghg-performance.html 39

https://www.cnbc.com/2019/05/21/reuters-america-update-3-bp-faces-climate-protests-at-investor-meeting-shell-gets-boost.html 40

https://divestment.xrnottingham.org/XRNottsPensionFundBPAndShellBriefingDocumentJan2020.pdf 41

See TPI, 2018 report here: http://www.lse.ac.uk/GranthamInstitute/tpi/wp-content/uploads/2018/11/Oil-and-gas-discussion-paper.pdf

16

That the emissions from the burning of the fossil fuel products the companies sell – as

calculated by TPI – dwarf the operational emissions of the companies.

That five of the ten companies studied have no emissions reduction targets at all.

That of the other five, three - BP, ConocoPhillips and Eni - have set targets relating to their

operational emissions. However, operational emissions are – in LGPS Central’s interpretation

of the paper – ‘irrelevant’ when set against emissions from sold products42.

That two companies - Shell and Total - have ‘expressed ambitions’ to reduce emissions

relating to sold products as well as operational emissions.

However, “No company has proposed to reduce its carbon intensity sufficiently to be aligned

with a 2 Degrees or Below 2 Degrees benchmark by 2050. No company currently plans to

achieve net-zero emissions by 2050”43.

That “In the long term, if dangerous climate change is to be avoided, only low-carbon

sources can be used”44.

It should be noted that recent developments with Shell – as described above – now mean that it is

aiming to reduce emissions from sold products (Scope 3 emissions). It purports to be aiming to meet

a ‘2 Degrees or below’ target, though whether its current actions would achieve even a 2 degree

goal is highly questionable.

Taking this and the discussion paper together, it can be seen that a large majority of oil and gas

companies do not currently measure the major part of their emissions: those from the products they

sell. Most have no reduction targets relating to these emissions, and those targets which do exist are

likely insufficient to meet the Paris Agreement targets relating even to 2 degrees of global warming

(now judged a catastrophic level of warming, as discussed above).

Engagement with these companies has a higher chance of bringing about reductions in their operational emissions, but in LGPS Central’s own words these are ‘irrelevant’. Engagement to date has had very little practical impact on the emissions of fossil fuel companies. Even those seen as better performers continue to ‘look both ways’ on climate change, paying lip-service to concerns while continuing to plan major new oil and gas investments and making limited clean energy investments. As discussed in detail in XR Nottingham’s BP and Shell briefing note, expert analysis projects that companies plan major investments in fossil fuel projects over the next ten years. As the TPI report says, it is only by transitioning rapidly to becoming solely clean energy producers that the most dangerous impacts of climate change can be avoided. Oil and gas companies have known about climate change for decades, while some have actively sought to undermine climate science and thwart effective policy to address it. Analysis by the group InfluenceMap also shows continuing major lobbying efforts by fossil fuel companies in support of expansion of oil and gas exploration and production45.

42

See discussion of the paper here https://lgpscentral.co.uk/wp-content/uploads/2018/11/LGPS-Central-Quarterly-Stewardship-Report-No-2.pdf 43

TPI 2018, p.24 44

Ibid, p.23 45

https://influencemap.org/report/How-Big-Oil-Continues-to-Oppose-the-Paris-Agreement-38212275958aa21196dae3b76220bddc

17

5. Cleaner investment funds are available, or can be developed, offering similar or better financial returns Mainstream investments in financial markets are easily possible without investing in fossil fuel

shares:

There is now a sustainable investment fund available which Nottinghamshire Pension

Fund can invest in through its membership of LGPS Central.

Analysis by FTSE and its US equivalent MSCI shows that share indexes which invest across

the stock market but exclude or weight very heavily against fossil fuel stocks perform at

least as well as those that include them. Nottinghamshire Pension Fund and its LGPS

Partners can use such indexes in designing diversified investment funds which perform

strongly. If properly designed these funds could both eliminate financial risk from

stranded assets and invest in the green economy.

The Environment Agency Pension Fund has almost completely divested from fossil fuels

over the last five years by changing its investments.

Southwark Pension Fund – which has a divestment policy – has as a first step invested

around 20% of its fund value in shares in low-carbon companies.

The ‘Clean 200’ lists publically traded companies whose shares represent positive

investment opportunities for the Fund.

The above points will now be looked at in turn.

West Midlands Pension Fund Sustainable Equities mandate

West Midlands Pension Fund - which is a member of the LGPS Central Investment Pool - in March 2019 appointed a company called WHEB to manage its global sustainable equity mandate. This will provide all nine Local Authority funds in the Central pool – including Nottinghamshire – with the opportunity to invest in a more sustainable way.

The WHEB website states that “[t]he mandate is expected to be managed using the same strategy as the existing FP WHEB Sustainability Fund…”46. The published holdings of the WHEB Sustainability Fund show that it invests in companies involved in areas such as ‘resource efficiency’, ‘sustainable transport’, ‘cleaner energy’, ‘environmental services’, ‘water management’ and ‘health’47. It currently has no investments in companies involved in fossil fuels.

This provides Nottinghamshire Pension Fund with a straightforward and strong opportunity for investing more sustainably.

46

http://www.whebgroup.com/investment-strategy/fp-wheb-sustainability-fund/fund-holdings/ 47

Holdings as at March 2019 http://www.whebgroup.com/media/2019/03/20190214-Portfolio-Holdings.pdf

18

Index-linked funds

The Pension Fund’s arguments for not divesting include the claim that the financial performance of

fossil fuel stocks is strong over time and that the financial risk posed by stranded assets48 is managed

by holding a diversified portfolio of shares across many different sectors.

Over recent years nine ‘sustainable investment’ indexes have been developed by FTSE49. These

include indexes which exclude or weight very heavily against fossil fuels. Similarly, the US-based

index provider MSCI has produced a suite of ‘Ex’-Fossil Fuel Indexes.

These indexes are designed for use by fund managers in developing or commissioning the

development of index-tracking funds, which hold a diversified portfolio of shares.

MSCI’s Ex Fossil Fuel Index excludes companies that own fossil fuel reserves. The chart below shows

the performance of the Index over the period 2010-2019, benchmarked against the performance of

MSCI’s main index (which includes fossil fuel stocks)50.

It can be seen that the performance of the Ex Fossil Fuel index is comparable to that of the main

index, and is in fact slightly superior.

A slightly differentiated index is the FTSE Divest-Invest Developed 200. This “is designed to

incorporate a combination of rules-based strategies to reduce exposure to companies from certain

ICB subsectors associated with the high carbon economy and obtain increased exposure to

companies engaged in the transition to a green economy”51. This index largely though not

48

It is notable that in recent correspondence with Extinction Rebellion Nottingham one of the administrators of the Pension Fund has said that stranded fossil fuel assets do indeed represent a financial risk. 49

See ‘Sustainable Investment’ indexes which can be selected from the ‘Type’ menu here: https://www.ftse.com/products/indexmenu?scrollToSection=Sustainable_Investment 50

Taken from https://www.msci.com/documents/10199/d6f6d375-cadc-472f-9066-131321681404 (Note that the figures and graphs in this factsheet update each month) 51

FTSE Divest-Invest Developed 200 Factsheet found at https://www.ftserussell.com/analytics/factsheets/Home/Search (Note that the figures and graphs in this factsheet update each month)

19

completely excludes fossil fuel companies: the share of oil and gas companies in the index is 0.91%,

compared to 5.54% in the benchmark ‘developed’ all share index.

The graph below shows returns of the index over the last 5 years against the all stock benchmark. It

can be seen that the Divest-Invest Index yields higher returns52.

Indexes such as MSCI’s (which has a FTSE equivalent showing similar results53) could be used by

Nottinghamshire Pension Fund and its LGPS Central partners to develop or commission the

development of funds which exclude investments in fossil fuel companies. The FTSE Divest-Invest

Index meanwhile proves the potential for funds which greatly reduce fossil fuel investments while

also investing positively in the green economy.

Financial performance of the share portfolio would be maintained with this new strategy, while the

financial risk of stranded assets would be eliminated.

Environment Agency Pension Fund

Having made the decision to divest in October 2015, The Environment Agency Pension Fund has now

almost completely divested from fossil fuels over the last few years by changing its investments. It

has achieved its divestment goals ahead of schedule54.

The case of Southwark Pension Fund

In September 2017 Southwark Pension Fund agreed a long term plan for the reduction of investment

exposure to fossil fuels. As detailed in its 2017-18 Annual Report55, as the first stage of its divestment

strategy the Southwark fund quickly made the decision to allocate £300m – around 20% of the

52

ibid 53

See FTSE All World Ex Fossil Fuels Index Series Factsheet https://www.ftserussell.com/analytics/factsheets/Home/Search 54

See https://www.eapf.org.uk/investments/climate-change/tackling-climate-risk 55

Annual Report 2017/18 https://www.southwark.gov.uk/council-and-democracy/pensions/pension-fund

20

whole fund’s value - to specific low carbon ‘passive’ equity. Equity is assessed as low carbon - or not

- using carbon footprinting.

The Southwark fund also agreed a new 5% target allocation to sustainable infrastructure, with £30m committed to Glenmont Clean Energy Fund which will invest in solar, wind and bio energy production across UK and Europe.

The Clean 200 list

The Clean 200 list has been developed to help investors such as the Pension Fund invest in the transition to renewable energy. It lists 200 publicly-traded companies that are leading the way on clean energy solutions56.

Lower carbon passive funds

As a footnote to this section it is worth noting that a number of lower carbon passive funds are

already available for investing in, including some offered by Legal & General Investment

Management, who manage well over £1bn of the Pension Fund’s passive fund investments.

Though lower carbon, it is unclear however from publically available information how much each

one limits fossil fuel investments, meaning that the Fund should instead act to ensure it has fossil-

free passive funds to invest in.

6. Investments can be made which bring economic, social and

environmental benefits to Nottinghamshire

There is great potential for investigation by the Pension Fund of local, sustainable investments. A number of employer members of the Fund have ambitious climate change mitigation policies and projects, for which the Pension Fund could be a source of investment. Some of the Fund’s investments could therefore be positive ones for the people of Nottingham and Nottinghamshire, rather than investments in global corporations causing ecological and social breakdown.

In its November 2018 presentation to the Fund’s Working Party, the Fund’s advisor on Responsible

Investment discussed investing for ‘non-financial’ reasons. The following examples were given:

Investing in local businesses or infrastructure

Divesting or investing for ethical reasons

Investing for impact, i.e. additional social impact from investment

In order to make such investments, it would need to be shown that they do not pose a significant

risk of being financially detrimental to the Fund, and that Fund members share the concerns which

would prompt these investments.

Local investment by the Fund offers a potential source of finance for local projects that seek to

reduce greenhouse gas emissions or have other socially beneficial aims.

56

https://www.asyousow.org/reports/clean200-2019-q1

21

As a result of unambitious Central Government policies, there is currently a lack of funding available

for investment in renewable energy and energy efficiency projects. Local investment by the Pension

Fund could replace this, providing benefits for local people, the local environment and the local

economy.

A number of employer member organisations of the Fund – including Local Authority members –

themselves have progressive policies and targets on climate change mitigation, and a number

operate specific renewable energy or energy efficiency projects.

While the presentation to the Fund’s Working Party mentions the potential for conflicts of interest in

decisions on local investments, the possible local benefits mean that all opportunities should be fully

investigated and conflicts of interest resolved wherever possible.

It is known that the Fund does have a local investment fund. Available information suggests however

that investment in low carbon projects is not a strong priority for it.

The Fund’s investment in Langar Solar Fund (through a £1.5m loan) provides a positive but to date

isolated example of the potential for investments which provide local benefits that are economic,

environmental and social. The Solar Farm is managed by Nottinghamshire Community Energy, a

Community Benefit Society “set up to deliver community-owned renewable energy, low carbon

energy and energy efficiency projects in Nottinghamshire”57. It recycles 100% of surplus profits into

local communities58 and helps to reduce carbon emissions.

57

See http://nce.coop/about/ 58

See http://nce.coop/community-fund/

22

Extinction Rebellion Nottingham demands In light of the information set out and the imperative nature of action on climate change, Extinction

Rebellion Nottingham calls on Nottinghamshire Pension Fund to:

Declare a target to divest from all fossil fuel-related assets within the next three years.

Publish an audit of all investments to give Pension Fund members and the public information

on the level of climate risk the Pension Fund is at. This would include the current level of

fossil fuel equity investments, and the levels of infrastructure investments in both low- and

high-carbon projects.

Produce and implement a plan for divestment and the alternative investments which will be

made. To include:

o As soon as possible, investment in the LGPS Central sustainable equities fund as well

as other fossil-free active funds. The level of such investments should increase over

the three year period, replacing active fund investments containing fossil stocks.

o As soon as possible, increase direct investments in equity of stock market-listed

renewable energy companies and other sustainable companies producing products

which benefit environmental sustainability. The level of such investments should

increase over the three year period, replacing direct investments in fossil fuel

companies.

o Progressive increases in clean infrastructure investments and decreases in

investment in funds which finance high carbon infrastructure.

o As soon as possible, investigation of opportunities for investments in passive equity

funds based on indexes which exclude fossil fuels.

o Investment in these fossil-free equity funds. Over the three year period such

investments to progressively replace investments in funds which include fossil fuel

equities.

o Investigation of new local investment opportunities which bring social and

environmental benefits. This may include opportunities for investment in employer

members’ own sustainable projects.