The Assistant Director – Investment Strategy presented the Q1 Investment Performance Report for members to consider.

Members reflected on the Renewable Energy and Climate Opportunities funds and asked when they were expected to show more positive performance and why Renewable Energy showed a net reduction.

The Assistant Director – Investment Strategy explained that as both were relatively new investments, current performance as set out in the report was expected due to fees requiring payment on the whole committed investment but that as the investment period progressed, the performance was expected to improve within 2 to 5 years. It was explained that the net reduction in the Renewable Energy fund was due to old investments maturing and that new investment was being made but not yet showing on the report.

Members questioned again whether, given the high level of the fund, it was now the time to look at addressing climate risk in portfolios in different ways to achieve the net zero goal.

The Director explained that the Authority was obliged to pool investments so would need the cooperation of Border to Coast Pensions Partnership. It was explained that should the funding level remain high once a valuation of the Fund is complete, then it could be expected to look at taking less risk, however, as the Fund continues to need to provide benefits for current and future members as an open scheme, continued growth is required from investment to meet demand meaning scope for taking less risk was limited.

The Chief Executive Officer of Border to Coast Pensions Partnership added that there was more to mitigating climate risk than the carbon footprint of hard-to-abate industries. It was explained that the increased use of Scope 3 as a metric to measure indirect emissions would change understanding of how society can use less energy rather than focussing on direct emissions. It was expressed that it was a very complex situation and that any changes needed to be made in a safe and informed way.

The Assistant Director – Investment Strategy explained that the expectation was that interest rates would fall and this would lower the funding level so a long term strategy was appropriate. It was stated that investment was moving to avoid having stranded assets and to invest in new technology particularly with the Border to Coast Climate Opportunities fund but this was a long term and complex strategy.

Members recognised the complexities of the issue but asked for clarification on the potential impact of continuing to invest in hard to abate industries and whether there was any modelling on the potential impact of removing investment.

The Chief Executive Officer of Border to Coast Pensions Partnership explained that there had been extensive modelling on the impact of divestment versus engagement and that the results were complex and nuanced. It was explained that some companies were rejected due to Responsible Investment policy but the whole sector could not be excluded completely and that engagement causing change from within could be more effective that divestment. Members were referred to the Border to Coast Report: Assessing the Real Impact of Fossil Fuel Divestment

Members asked whether responsible investment policies could skew investment away from UK equities to international investment given that UK has a proportionally high number of hard to abate industry and asked how SYPA would focus on local climate related investing within the UK to improve and enhance greener living in South Yorkshire.

The Chief Executive Officer of Border to Coast Pensions Partnership explained that it was important for UK companies to gain capital to enable them to remain listed in the UK and that there was policy encouraging this which should see results in the near future. It was stated that the UK needs this better growth strategy to encourage investment for long term improvement and better returns. The Assistant Director – Investment Strategy explained that investment was currently done at a nationwide level but that management to look at new economy sectors and climate opportunities local to the region was being developed but there would always remain the need to achieve the required returns. The Chief Executive Officer of Border to Coast Pensions Partnership added that if local investment opportunities that met criteria were there, they would be utilised but that investment managers who can recognise these opportunities needed to be in place and there needed to be collective focus on improving UK opportunities to allow safe investment with the required returns. It was stated it could take up to ten years of focus on improving UK opportunities before returns would be seen.

Members asked for a time frame of when the Private Equity current asset allocation was expected to return to an agreed range. The Assistant Director – Investments estimated that it would take 2 to 3 years  to return to range as many of the related funds were in their final years of investment.

RESOLVED: Members noted the report.