To receive a presentation from Mercer, including the work commissioned on Climate Change modelling.
Minutes:
Hill Gaston, Mercer, delivered a presentation on investments that included the work commissioned on climate change modelling.
Within the presentation, the importance of climate change from an investor perspective, evidence of the global climate change crisis from the public perspective, and the evolving risks and opportunity across the Global Risks Landscape was discussed.
During the section that discussed investment objectives and the achievement of ESG goals, members questioned how returns had changed over time in regard to sustainable investment. In response, Mercer made reference to a study by Deutsche Asset Management and the University of Hamburg which provided academic evidence that suggested companies who integrated ESG factors into the investment process achieved a non-negative, positive to neutral performance correlation. As a follow up, it was asked whether these correlations were against traditional investment methods. It was clarified that the study in question considered different asset classes for ESG investments such as emerging markets, corporate bonds and green real estate, and provided a more holistic and generalisable view point.
It was noted that sustainably focussed funds had outperformed their peers throughout COVID-19 with positive performance returns, but there were a lot of dependants such as different sectors and asset classes.
The difference between average American fossil fuel consumption in comparison with average European consumption was discussed and it was asked how the Wiltshire Pension Fund can exert more influence. It was suggested that in light of China’s recent pledge to become carbon neutral by 2060, they would consider the market advantages of becoming a competitive leader ahead of the USA and would strive to transition quickly, which could in turn force the USA’s hand to follow suit.
One member of the Committee questioned when the TCFD (Task Force on Climate-related Financial Disclosures) recommended framework would be written into UK law, to which it was clarified that exact timelines were uncertain, but it was confirmed that occupational pension schemes of greater than £5 billion in assets would be expected to report in line with the TCFD no later than the end of 2022, and schemes of £1-5 billion in assets would be expected to report in line by the end of 2023.
Another member of the Committee raised concerns as to the content of the Mercer presentation which they felt was slanted towards a political agenda as opposed to concentrating on politically neutral investment strategies. Officers reiterated that the intention of the presentation was to provide a wealth of background context and information to the work that Mercer would undertake, and that a more substantial and detailed report would be prepared for December. Said report would set out specific figures for the performance of the portfolio under different scenarios to enable informed decision making in regard to optimal strategic positioning.
Mercer’s climate change approach and analysis was discussed in which different scenarios, risk factors and timeframes were discussed in regard to incremental 1°C temperature rises. Rapid changes to the market were noted with different stresses and strains due to the dynamic nature of climate change, along with the need for significant technological breakthroughs. Reference was made to the physical damages of climate change which included the rise of frequent hurricanes, the availability of natural resources, and how these manifestations would impact returns. It was confirmed that if the global warming trajectory shifted towards a 2°C - 4°C pathway then swift stress testing would be implemented to provide practicable results to redesign and align strategic asset allocations to resemble the current strategy and assist in the understanding of the key differences between results.
The four ways that Mercer would analysis the portfolio were discussed, and it was confirmed that the modelling would focus on the impact of the various scenarios on both the existing strategic asset allocation, and one with a more sustainable tilt. It would also consider asset classes to prioritise the risks and opportunities, would evaluate portfolio construction and would look at stress testing as mentioned above. The possible outcomes of actions that Mercer recommended to implement as a result of the modelling were briefly discussed and the need for a strategic perspective to understand key risks and opportunities to enable a holistic approach to dealing with climate change risks was highlighted.
The Chairman reiterated that the Committee was the body that set the investment strategy and direction and that Brunel selects and monitors the Fund managers.
In response to a question from the Committee in regard to asset classes, the mitigation aspects of insurance linked securities and whether this would be included in the analysis, it was confirmed that the model showed negative results from those strategies. Officers noted that as a consequence of a past training item on strategic asset allocation that considered private debt, private equity and insurance linked securities, it was concluded that this asst class was too high a risk to the WPF as the confidence of returns into the future when considering climate change scenarios posed too much uncertainty.
Members noted their anticipation of a more detailed report and the results of the analysis.
Members took a comfort break from 11:40am – 11:50am.
As an aside, Richard Bullen, Fund Governance and Performance Manager, reminded members of a self-assessment review being circulated in October that would allow them to provide details of any training needs for 2021-22. An online training portal created by Hymans Robertson that included a series of modules was put forward to members, due to the inability to attend seminars and conferences, which would enable members to maintain their current knowledge and understanding across topical pension issues.