The East Sussex Pension Fund is investing £200m of its passive equities in the Osmosis Resource Efficient Ex-Fossil Fuels Strategy in a move which will almost rid the UK local authority fund’s portfolio of fossil fuels.
Councillor Gerard Fox, chair of East Sussex pension committee, said: “We are excited to be the first LGPS fund investing in this product, and it is a great addition to a number of changes already in place as part of the fund’s climate response implemented as a result of its statement of responsible investment principles.”
He said that while keeping fees low for its members by retaining passive equities, and with the exposure to carbon, water and waste all being reduced, the committee felt this new investment met a number of key objectives for the pension fund.
Osmosis Investment Management is advising the passive equity and UBS Asset Management is acting as investment manager – with Isio having supported the development of an investment strategy aligned with the pension fund’s objectives, according to a statement from the parties involved.
The Osmosis strategy uses quantitative screening process to remove companies generating more than 5% of revenue from nuclear energy, any company associated with nuclear weapons, controversial weapons, civilian firearms, tobacco, thermal coal, oil sands and businesses that are not compliant with the United Nations Global Compact principles, according to Osmosis.
The firm said companies in the utilities sector showing evidence of a transition to sustainable business models were eligible for re-introduction if they also had a “positive resource efficiency score”.
This allowed investors to divest from fossil fuels “while still capturing the value added by transitioning companies within a passive mandate”, it said.
A spokesperson for the firm said the Osmosis approach differed from other ex-fossil fuel funds because, by specifically allocating capital to resource-efficient companies and through investor stewardship, it was actively incentivising transition across the remainder of the economy.
She said that while thermal coal and oil sands were excluded in their entirety from the fund, oil and gas companies were considered on a revenue basis.
This shift of assets into the Osmosis fund will reduce the East Sussex Pension Fund’s fossil fuel holdings, a spokesperson for the fund told IPE.
At the end of September 2021, the pension fund had 0.4%, or £17m of its £4.57bn in total assets under management in fossil fuels within its passive equity portfolio and it said the Osmosis investment would cut this fossil exposure to zero.
Another shift in the overall equities portfolio that is currently underway – moving an 11% slice of total AUM, classed as beta allocation, from Baillie Gifford’s Global Alpha Equity Fund to the Scottish manager’s Paris-Aligned Fund – will remove a further £0.1% (£5m) of fossil fuel holdings, the spokesperson said.
“Once both changes are fully implemented there will be no fossil fuel holdings in the equity allocation,” she said.
The East Sussex Pension Fund has agreed to remove fossil fuel companies from its passive equity holdings, she said, “as there is no conviction within a passive mandate to own these companies specifically, and there is generally reduced active ownership and engagement”.
Over the past 18 months, the UK pension fund has already moved a large portion of its passive equities into Storebrand Global ESG Plus strategy, which is fossil fuel free, and into two impact funds managed by WHEB and Wellington, actively investing in climate solutions, she said.
The fund has exposure to fossil fuels in its other active asset classes, although it is limited.
This article was updated after publication to make clear the fund had not completely exited fossil fuels.