In his recent keynote address at the Global Projects Exchange in New York, Professor Joseph Stiglitz cited fiduciary duty as one of the "rules" that need "rewriting" in order to address climate change and inequality.
There is no doubt that a narrow interpretation of fiduciary duty can drive short-term behaviours. However, last year the UK's Law Commission helpfully published a report stating environmental, social or governance (ESG) issues, where financially material to the performance of an investment, should be taken into account by trustees in their investment decision making.
So, spurred on by this guidance, in October 2015, the trustees of the UK's Environment Agency Pension Fund agreed a new Policy to address the impacts of climate change, becoming, we believe, the first pension scheme to align investment policy with a 2°C goal. This has not emerged from an ethical position, but embeds the increasing risks associated with changing climate at the heart of our investment processes.
The policy we have set out represents over a decade of work weighing up climate issues as part of an investment strategy that addresses the impacts of climate change. This includes partnering with Mercer and 17 fellow investment industry participants in a research study Investing in a time of climate change to gain further insight into the investment implications of climate change.
With assets of £2.9billion and liabilities stretching into next century, we believe that we would be in breach of our fiduciary duty to act in the best interests of our members if we failed to reduce our exposure to fossil fuels. We have set out a target of decarbonising our equity portfolio, reducing our exposure to "future emissions" by 90 per cent for coal and 50 per cent for oil and gas by 2020 compared to the exposure in our underlying benchmark as at 31 March 2015.
Our policy also sets out how we will deliver long term financial returns through positive investment in the low carbon economy and through engaging others in transitioning to low carbon. This will include investing almost £450m in low-carbon and energy-efficient stocks and assets, perhaps the most challenging goal to achieve.
The targets set for 2020 combines a positive investment focus with a comprehensive engagement programme that will look to specific objectives and key performance indicators for carbon intensive companies. Working with our fund managers, we will set investment case review dates for specific companies and, where insufficient progress has been made by a company, we will consider selective risk-based disinvestment.
As with other pension schemes, the Environment Agency Pension Fund is investing today to cater for the needs of our members perhaps up to 100 years from now. That we are doing so with climate impacts in mind sends, I believe, an important message: if we really want to adapt to climate change, it is crucial to embed this process deeply into our business and financial systems, enabling us to build truly sustainable models of adaptation to climate change.