Oxfordshire’s local government pension fund doing its bit to combat climate change

Employees who pay into a major local government-based pension scheme can be confident that those who manage it are doing their bit to combat climate change with a 17.7 per cent reduction in emissions having been achieved across measurable investments.

Staff at all six Oxfordshire councils and many other local organisations pay into the Oxfordshire Pension Fund. A recently published report has revealed that, in 2020, the fund achieved the reduction in emissions and significantly beat its original target of 7.6 per cent

That target was based on the Paris Agreement, which aims to limit post-industrial global temperature rises to 1.5°C. The Paris Agreement drew on scientific consensus to set its targets.

The report is the first review since the fund adopted its climate change policy in 2020. Oxfordshire was not required to publish its first report until 2023 but believed transparency on its climate investing was too important to delay.

Councillor Bob Johnston, Chair of the Pension Fund Committee, said: “There are many different arguments over the most effective climate investing strategy or policy, but the real proof is in the numbers. On that basis, Oxfordshire Pension Fund has made an exceptionally strong start, far outperforming its interim target in its first report, and putting it very much on track to deliver on its pledge to be Paris-aligned across all pension investments.”

In addition to the reduction in emissions, the report also shows that the fund’s exposure to fossil fuel reserves decreased by 30 per cent over the year –reserves are an indicator of fossil fuel holdings and pose a potential stranded asset risk. Reserves exposure is an important factor in assessing the success of a climate transition investment strategy.

Furthermore, on 10 September, the fund’s committee voted to move the full value of the fund’s passive equity investments of around £535 million, to a newly launched Paris aligned benchmark fund designed to align with the Paris Agreement goals. The new fund will achieve an immediate reduction in emissions and fossil fuel reserves of 50 per cent and will deliver annual emissions reductions of at least seven per cent per annum. It will also effectively exclude all investments in coal, oil and gas companies.

Al Chisholm, from campaign group Fossil Free Oxfordshire, said: “We are delighted that not only has the fund reduced its emissions and fossil fuel reserves so dramatically, but the Pension Fund Committee has also chosen to move its passive investments out of companies that continue to explore for new fossil fuels. We see this as a critical step on the path to investing for a safer climate and more just world and would like to congratulate the committee for taking this decisive and forward-looking step.”

Benchmarks are a major structural challenge for investors seeking Paris alignment. While passive funds offer crucial low-cost and diversification benefits, benchmarks are traditionally emissions-blind. Instead, they tend to be based on other factors, perhaps most commonly, market capitalisation.

The new benchmarks, which have been developed by FTSE Russell and Brunel Pension Partnership, provide a new way to target Paris alignment with passive investments. They draw on recent guidance from the the Institutional Investors Group on Climate Change Net Zero Investment Framework. They also meet the EU’s Paris-Aligned benchmark guidelines by achieving a 50 per cent reduction in carbon emissions across a ten-year period.

Brunel Pension Partnership Limited has been established to pool the investment assets on behalf of ten local government pension scheme funds. The participating funds are Avon, Buckinghamshire, Cornwall, Devon, Dorset, The Environment Agency Pension Fund, Gloucestershire, Oxfordshire, Somerset and Wiltshire. Brunel is owned by the 10 public sector organisations responsible for the funds, with each having an equal share in the company.

David Vickers, Chief Investment Officer at Brunel Pension Partnership, said: “The new indices provide the industry with fresh tools to implement the Paris Agreement. We call on investors to quickly make use of the benchmarks in their quest to support the climate transition.”