It would not be “progressive” for the £2.2bn (€2.7bn) Environment Agency Pension Fund (EAPF) to divest its fossil fuel holdings, an independent analysis of its portfolio has found.
The fund, which is part of the Local Government Pension Scheme (LGPS), asked consultancy Trucost to calculate its exposure to stranded fossil fuel assets via its existing investments.
EAPF already integrates the consideration of environmental, social and governance issues in its investment decision-making process.
Trucost, however, analysed the extent at which the EAPF portfolios are exposed to carbon stores that may be embedded within listed companies.
It found none of the EAPF’s nine portfolios were significantly more exposed to these stores more than the relative benchmark index.
One of the fund’s portfolios, however, had a 15% exposure to fossil furl extractive companies, but this was still ten percentage points lower than the FTSE 100 index.
The report from Trucost also provided a range of recommendations for the fund, in order to assess and manage the risks associated with embedded carbon emissions.
It said those asset owners exposed to the fossil industry should not consider divestment, suggesting it is neither industry leading nor a progressive approach.
Funds should be part of the conversation and influence decisions, the report said, and reducing capital exposure does not precipitate a reduced prevalence of the industry.
“An asset owner the size of the EAPF, would be unable to affect the values put on the future cash flows of fossil companies simply by divesting its holdings in those companies,” the report said.
“Even a coordinated action by the entire universe of university endowments and public pensions funds would unsurprisingly be rapidly corrected by neutral investors eager to take advantage of a temporary depression in market sentiment.”
Trucost also said investors should lobby for disclosure from fossil fuel companies, suggesting its own analysis on the EAPF’s exposure was hampered by the lack of ready information from organisations.
It said not enough companies disclose data which allows for robust analysis, and only a distint minority make reserves data, broken down by fuel type, available.
This makes accurate emissions profiling of companies, and portfolios, statically inadequate, Trucost said, and funds should engage to ensure comprehensive data is publically available.
Investors in indices and fossil companies should also engage with the management to ensure, and understand, plans on the development of new fossil fuels, and the shift to a lower carbon economy.
They should also raise awareness of stranded assets in fossil companies, encouraging governments to legislate for said transition.
Chief investment and risk office at the EAPF, Faith Ward, said the fund had identified key actions based on Trucost’s analysis.
“The EAPF has made considerable progress in addressing climate risk,” she said, “but there are still opportunities to further reduce the financial risk to the portfolio and potentially increase the returns of the fund as a shareholder.”
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