Agenda item

Consider report by Isio. (Copy attached.)

6.1       There had been circulated copies of a report by Isio on Responsible Investment Metrics and Targets with the agenda.  The Chairman welcomed Mr Andrew Singh and Mr Alex Ross of Isio to present the report.  Mr Singh explained that since the publication of the agenda updated figures had been provided by some fund managers, and that he would highlight the impact of those changes where appropriate.  The report followed training for Members on Responsible Investment which had taken place in August 2022.  Mr Singh highlighted that the monitoring information in the report was also required for the 2020 UK Stewardship code and was expected to be required to comply with upcoming TCFD regulation.   The training for Members had highlighted Responsible Investment considerations, climate science and TCFD Regulations; the importance of monitoring ESG metrics; and the various environmental and climate related metrics that could be monitored.  The report detailed the results of the Fund’s first annual Responsible Investment Metrics and Targets Assessment.  It also documented each investment manager’s ability to report on the required metrics and their current position.   Those results should be used to guide decision making and action taken as a result could be documented.  Mr Singh explained that the four responsible investment metrics that the managers had been asked to report on were carbon emissions, carbon footprint, implied temperature rise, and climate-related engagements. Carbon emissions and carbon footprint had the highest percentage of data, with 70% of managers able to report.   57% of managers could report on climate-related engagements, which was an acceptable rate.  Mr Singh expected that the percentage of managers that could report on the implied temperature rise metric, which was the lowest at 31%, would rise at an appropriate rate. 

6.2       A table outlining how each manager had performed against the metrics was provided in the report.  The infrastructure investments made in conjunction with the Lothian Pension Fund was omitted from the table due to its overall small size, and its expected contribution was low.  The reporting of data in this area was evolving, and had the potential to drive improvement in a major way.  Mr Singh outlined the revised data, highlighting that Permira had gone from 22,726 to 504 with regard to their carbon emissions. M&G had also reduced significantly from 769,006 to 8,000 with regard to carbon emissions.  Overall, using the adjusted numbers, the total greenhouse gas emissions for the portfolio was 162,269 metric tonnes.  On a normalised basis, the adjusted emissions were 2,324 metric tonnes.  The weighted average carbon footprint of the portfolio was 17 metric tonnes per $1 million investment.  The implied temperature rise ranged from 1.8 degrees Celsius to 3.2 degrees Celsius.  Normalised implied temperature rise across the managers was 2.5 degrees Celsius.  There were 290 individual climate engagements with companies that had been reported.  Normalised across the managers there were 48 engagements, with an expectation that this would increase in the future.  The biggest emitter in the portfolio was the M&G Alpha Opportunities Fund from an absolute perspective, whilst LGT reported a higher carbon footprint than Permira despite having a lower absolute emissions level.  Mr Singh advised that Isio would engage with the largest emitters across the portfolio to assess the direction of travel and to seek a decrease in the emissions, and would push for better data consistency.  In response to a question regarding how carbon emissions could be physically weighed, Mr Singh explained that a metric ton was a standard unit of measurement used scientifically across industry and the world.  Regarding implied temperature rise projection and monitoring, Mr Singh explained that following the Paris agreement there was a globally agreed goal to restrict temperature rises below 2 degrees Celsius, and that a variety of scenario modelling would have been undertaken by companies which took into account business plans that would predict what pathway they were aligned to.  A growing number of ESG data providers and climate modellers were active in the area, with many fund managers engaging specialists to assess the impact and predict a temperature rise based on their available data.  Isio were actively engaged in the area to verify the accuracy of those models and to provide independent analysis.  In response to a question regarding whether administration costs would increase as a result of regulatory changes, Mr Singh explained that managers would be required to comply with regulation changes for all of their clients, and that it was therefore expected that managers would spread any increased administrative costs across their clients on an equitable basis.   Regarding the Bailie Gifford Paris Aligned Equity Fund, and its categorisation as amber within the report despite being chosen as an investment fund due to its green credentials, Mr Singh advised that the Fund excluded fossil fuels and high emissions from investment, and that the Fund sought to improve the emissions levels of the companies that it invested in.  In response to a request, Mr Singh undertook to present progress updates rather than solely provide a snapshot with future reports. 

            DECISION

            NOTED the report.