Wandsworth pension fund, part of the UK’s local government pension scheme (LGPS), has begun the process of reducing investment in fossil fuels after embedding climate risk and decarbonisation in its investment policy.
Like many other LGPS funds, the Wandsworth scheme believes that engagement is better than divestment, but last year it made the decision to change its equity allocation from 60%, split 24% UK and 36% global, to 55% global, which would significantly reduce its weighting to fossil fuels.
In keeping with the new equity allocation, the £2.1bn (€2.4bn) pension fund has started to progressively reduce investment in UK equities and instead focussing on global investments.
The pension fund also decided that assets must comply with its decarbonisation agenda, which led to its transitioning equity mandates into new investments such as the LGIM Future World Global Fund.
The pension fund last year also agreed to invest more in renewable energy funds, and has committed to investing £110m in a renewable energy fund of funds recently launched by asset pool London CIV.
The pension fund, which is run jointly by Wandsworth and Richmond councils, has also committed to a JP Morgan Infrastructure Fund that invests significantly in solar and wind projects.
The move to embed climate risk and decarbonisation in the pension fund’s policy came after the joint pensions committee “invested considerable time and effort” in considering its approach to ESG, according to information shared with IPE.
Steps it took included undertaking training on environmental, social and governance (ESG) issues and carrying out a carbon footprint analysis.
It also carried out climate change scenario analysis identifying opportunities to set a strategy to deliver outperformance in a 2°C environment.
The pension fund uses weighted average carbon intensity to measure its exposure to carbon intensive assets.
“Switching to environmentally-friendly investments will be a gradual process in order to minimise risk”
Guy Senior, chair of the joint pensions committee
“We came to the conclusion last year that maximising the performance of the fund and supporting the council’s pledge to tackle global warming did not have to be mutually exclusive,” said Guy Senior, chair of the joint pensions committee.
“We have set the target of reducing investments in stocks and shares by five per cent, but we will continue to review this as we suspect it will make economic sense to reduce it still further.
“Switching to environmentally-friendly investments will be a gradual process in order to minimise risk, but our equity portfolio in January was already thirty per cent below the nationally-set carbon footprint benchmark.
“We will continue to hold our fund managers to account to ensure they consider the social environmental and ethical performance of a company when deciding whether or not to invest in it.”