Wiltshire Pension Fund in investment horizon dispute over oil sands divestment

LGPS fund encounters resistance to selling dirty stocks from managers due to investment case 'over the next five to 10 years'.

Wiltshire Pension Fund is in dispute over investment horizons with an external investment manager as it tries to exit Canadian oil sands firm MEG.

The UK local government pension scheme, which sits under the Brunel Pension Partnership pool, set out to identify and engage the top 10 emitters in its portfolio as part of its net-zero strategy. The 10 firms, which include Shell, LG, Glencore and Anglo-American, account for 40 percent of the emissions in its listed equity portfolio.

Wiltshire said in its 2023 climate report, published today, that its aim was not to immediately ditch the dirtiest stocks, but to carry out engagement to understand the mitigation efforts from its highest emitters.

“We may be happy to invest in a highly emitting company if our investment can help finance its transition to a low-carbon economy,” the fund said, while noting that the inclusion of a company that is either unwilling or unable to transition presents a clear financial risk.

Of the 10 firms, five were approved for continued investment. Glencore, for instance, was deemed to have reasonable targets. Wiltshire also said the money from its coal mines will help fund the transition towards materials, an increasing area of capex.

Anglo-American, India’s Reliance Industries and Shell were also given leave to remain, but Wiltshire said it would continue to monitor their progress. The investor flagged poor governance and a lack of interim targets as issues for Reliance, for example, but noted that the company has an ambitious 2035 net-zero goal.

However, Wiltshire named both the Canadian oil sands firms in the top 10 list – Suncor Energy and MEG Energy – as candidates for divestment on the basis that they are “fundamentally misaligned with a net-zero future”.

While the carbon intensity of most of the fund’s investments decreased or rose slightly versus 2022, the intensity of its investment in Brunel’s Global High Alpha fund rose by 66 percent, which Wiltshire attributed largely to both the addition of MEG and the increased weight of other fossil fuel firms due to valuation increases after Russia’s invasion of Ukraine.

The fund noted that it had been engaging Brunel over its holdings in Suncor since August 2021.

However, Royal London Asset Management (RLAM), which managed the fund that held Suncor, told Wiltshire that Suncor was being kept in the portfolio due to its ability to “demonstrate superior wealth creation” and said it was “attractively valued when this is considered”.

RLAM also reportedly told the scheme that Suncor had a “strong investment case over next five to 10 years, with credible and explicit 2030 goals, which will have a significant impact on carbon reduction”.

Wiltshire disagreed, arguing that Suncor’s operations “clearly do not align with the fund’s net-zero ambitions”. It pointed to previous queries about the legitimacy of Suncor’s decarbonisation commitments, given that these focused solely on operational emissions at a time when the firm was actively expanding extraction operations.

The scheme noted that, after the case study had been written for the report, RLAM decided to sell out from Suncor – a result Wiltshire said it was “delighted with”.

It added, however, that RLAM still holds MEG Energy, again citing a strong investment case over the next five to 10 years. Wiltshire said it had asked Brunel to sell the stock.

RLAM had not responded to a request for comment at the time of publication.

David Vickers, CIO at Brunel, told Responsible Investor that its approach to engagement and decarbonisation was agreed with all 10 of its client funds this year.

“We are in regular dialogue with all Brunel clients to ensure the implementation of the [climate] policy meets the level of ambition on climate and other objectives and there are other options for clients to utilise in order meet their objectives as they evolve,” he said.

While RLAM believes MEG is on the path to alignment, Vickers said Brunel had naturally been in extensive conversations to understand its rationale and provide appropriate challenge.

The manager is engaging directly with MEG management about its targets, decarbonisation strategy and milestones, and Brunel is kept updated on any stocks that are in its escalation process, he said.

Cementing commitments

In other developments in the report, cement company CRH was ditched from Brunel’s Paris-aligned benchmark fund in March this year as it scored poorly relative to other companies in the fund. This resulted in its weighting being reduced to zero in the February rebalancing.

Holcim is Wiltshire’s only remaining exposure to the cement industry. Despite accounting for 0.09 percent of Wiltshire’s active equity portfolio by value, it accounts for 6 percent of its carbon footprint. However, it remains safe from divestment for now, given high capex on carbon reduction and other decarbonisation initiatives.

After publication an RLAM spokesperson provided the following comment:

Royal London Asset Management’s aim is to always manage its investment mandates to deliver the best financial outcomes for its clients within the criteria specified in the management agreement.

The investment team’s decision to sell Suncor in the Brunel account was based on their investment analysis and their understanding of Brunel’s climate requirements. The decision was catalysed by a change in strategy from the incoming CEO which reduced the certainty of the future climate alignment of the business.

For other portfolios, we feel that continued engagement with the company, rather than divestment, is the correct approach.

We undertake thorough analysis of all holdings, both on financial fundamentals and environmental, social and governance factors. We take our responsibility to understand our clients’ requirements very seriously. Our decision to sell the holding of Suncor for this account reflects our focus on aligning with client mandates.