Mark Burton and Ben Irvine at MCC Finance Scrutiny Committee

What kind of a job are the city region’s investments doing in securing a viable future for the region – economically, socially, and for our living planet?

Back in September, 2013, we wrote to the then chair of Manchester City Council’s Finance Scrutiny Committee to request the committee examine the investments held by the city, and those in which the city has an interest. Our interest was the extent to which the choice of, and management of these investments was guided by ethical as well as merely financial considerations. In this we are following in a tradition of lobbying on local authority pension funds that goes back at least to the work of the Campaign Against the Arms Trade on divestment from munitions companies. Two meetings in 2014 looked at Manchester City council’s bankers and at its other investments, and began a consideration of the Greater Manchester Pension Fund, which is the huge fund responsible for the pensions of council workers in the whole of Greater Manchester. You can read about the two previous discussions on this site HERE and HERE.

On Thursday, 12 March, the committee again considered GMPF’s investment strategy. We were able to review the papers provided by the City treasurer, based on information from GMPF. We prepared a response to this which was circulated to members and GMPF before the meeting. You can read this detailed report HERE: it contains links to the relevant GMPF documents and other sources. In brief, we argued that,

1) While the Fund has been a leader in making direct investments in the local economy, “the Fund should consider more direct investment in schemes that deliver local prosperity, through job creation while bringing measurable environmental benefits, for example in housing retrofit and renewable energy generation”.
2) While encouraged to know that the Fund is actively engaging with companies over ethical questions, we questioned the effectiveness of this strategy on its own. We suggested that “the Committee may wish to consider its position on the fossil fuel investments held by the GMPF. At the minimum it may wish to know what the fund managers’ strategy is in relation to ‘un-burnable carbon’. They may also wish to recommend full or partial disinvestment.”
3) The GMPF’s approach to ethical investment, which dates from 2007, is becoming outdated. It rests upon assumptions about the nature of fiduciary duty that have been challenged in recent years, not just by activist outsiders, but from within the financial services industry itself. Indeed, “it may be a breach of fiduciary duties to fail to take account of environmental and social governance considerations that are relevant and to give them appropriate weight”. We therefore suggested the need for a review of the Fund’s Responsible Investment Policy.
4) Most of the Fund’s investments are in traded Stocks and Shares. Aspects of this portfolio should raise concerns. Just looking at the largest investments, there are multiple causes for concern. In addition to Shell and BP (£530M or 4.5 per cent of the Fund, at March, 2014), three mining companies and an armaments manufacturer. All the extractive companies have been implicated in human rights abuses, some as recently as last year (see our annotated chart in Appendix 3 to the report: Nestlé, Hewlett Packard (both the subject of boycotts), and Canadian Tar Sands, one of the most environmentally damaging enterprises on earth).

   
We argue that the approach of leaving most decisions to the discretion of Investment Fund managers is insufficient. It should be possible to both avoid investments in companies with damaging practices, and to positively favour those that are relatively benign or even positive in their impacts, without putting all the Fund’s assets in one sector or type of investment vehicle.

GMPF representatives were also there to present their approach. This is what happened at the meeting, although you can watch the recording of the meeting HERE – the relevant bit starts at 11.52 (1.52.57 into the meeting).

Councillor Kieran Quinn, of Oldham council, who is the Chair of GMPF began the discussion. He is also the Chair of the Local Government Pension Forum, which is also the collective voice of local government pension funds, and which has lobbied various companies. He made a brief resumé of the history of the Fund, in which he rightly noted its responsibility and effectiveness in delivering a good return on investments (the Fund itself has grown in value from £9.5Bn to 17.3Bn since the Great Financial Crash of 2008) so that pensions can be paid without an additional burden on local councils. He then addressed some of our points.

1) He asserted the value of the local infrastructure investments, such as the South Manchester development (with which we agree) and 1 St Peter’s Square (which we are less enthused by) for the local economy and local people. Our point about the need for clear criteria for environmental benefit was not addressed, although it was picked up to some extent in later discussion.

2) He asserted the value of dialogue with companies and the danger of losing the ability to influence as a result of disinvestment. An example he cited was the ability to influence health and safety practices in the Bangladeshi clothing industry. While we had suggested that the outcomes of intervention with companies were usually classed as dialogue, he rather strangely suggested this was disingenuous of us, in that “dialogue” covered a lot of very positive work.

3) He pointed to the Fund’s investments, current and in the pipeline, of some £150M in renewables (anaerobic digestion, wind and biofuels), social investments, SME’s.

At this point the acting Chair of the Committee, Cllr. Latchbury, apologised for not being aware of the agreement that we speak to the item and invited Mark Burton to contribute. (see video recording, 2hrs 9 min in) He drew attention to SSM’s report and responded to Cllr Quinn.

Firstly, he welcomed the focus on supporting the local economy and the work on engagement with companies, but said that while agreeing with the general direction here, and the need to ensure good returns for beneficiaries, Steady State Manchester was advocating much greater ambition from the Fund. On the ethical front.

Secondly he argued that while being a stakeholder allowed leverage with many companies, in some cases it was unlikely to make a significant difference: oil companies exist to exploit fossil fuels and yet we now know that the larger part of these reserves is un-burnable if the world is to avoid runaway warming – most of the oil must be left in the ground. Therefore in these cases a strategy of active divestment must be pursued as part of the rapid de-carbonisation of the economy that is needed to achieve net-zero carbon emissions. No less a figure than the Governor of the Bank of England, Mark Carney, has reiterated the message about stranded assets of the oil companies in the last week.

Thirdly, he drew attention to new thinking on fiduciary duty, arguing that the Fund’s policy needed an update and that it was problematic to outsource, without strong ethical guidance, so much decision making to Investment Fund Managers (who incidentally appear to charge a figure that is nearly 6% of the income from equities, net of any trading costs – an issue picked up on BBC Radio 4’s File on 4 programme this week).

It was perhaps a little unfortunate that SSM’s contribution took place before GMPF had finished. The next contribution was from Allan MacDougall, Managing Director of PIRC, not the Public Interest Research Centre, but Pensions & Investment Research Consultants Ltd, “The Voice of responsible Shareholders” and “Europe’s largest independent corporate governance and shareholder advisory consultancy”.

He noted that SSM recognises that GMPF is a leader in responsible investment. (We might not go quite that far, although we do acknowledge good practice). After what might be described as a rather whingey point about local government pension funds being a target for social and environmental activism, he asserted that “dialogue” with corporates is a robust form of engagement and that it is only in this sector that Fund Trustees engage face to face with companies. He argued strongly against divestment, suggesting that this would open the path to investors such as a Chinese investment bank (actually China is now doing more than most economies to shift to low carbon). This rather ignored the argument that divestment not only has the potential to hit companies through withdrawal of capital but also through creating a climate whereby societal priorities do indeed shift. This is what happened over apartheid (see this article by financial commentator Brett Scott who argues for a two track approach to what is above all a moral question).

However, Mr MacDougall did say that the fund wanted to raise its ambitions and that it was frustrating that despite dialogue, “companies fall back on unacceptable practices” despite promises made at shareholder meetings, something Councillor Quinn himself has been confronted with in the case of Barclays where legal sophistry was used to evade a commitment made.

On fiduciary duty, he cautioned that although there is now much opinion, there is limited case law, and he referred back to the NUM case that has set the frame for the conservative approach to the matter in this country. He recommended study of the Law Commission’s paper. Here is Share Action’s view on the matter – significantly it argues that the Law Commission was wrong in declining to issue statutory clarification on the interpretation of the duty.

The floor was now open to committee members. Councillor Nigel Murphy thanked SSM for “keeping us on our toes” and suggested that it would be appropriate for GMPF to update its Responsible Investment Strategy.

Councillor Quinn said that GMPF had already changed its ethics to include Environmental and Social Governance issues (it was a bit late to tell us this!). Indeed the tone of much of GMPF’s input was of the “we are already doing this” ilk. It would be good to see this revision, since (as of the time of writing) it does not appear on the GMPF website (incuding an initial search of Fund committee meetings).

Councillor Rabnawaz Akbar, who represents Manchester City Council on the Fund’s Advisory Panel also thanked SSM for the paper: it was encouraging that residents are making this challenge. He was confident that the Fund would take advantage of the emerging ethical market.

Disappointingly, other than councillors Murphy and Akbar (who did not speak as a member of the committee), Finance Scrutiny members showed little interest in the discussion and the committee did not pick up our suggested recommendations for the Fund, despite Ben Irvine from SSM explicitly drawing attention to them. For the record, they are:

1. The interpretation of fiduciary duty: to recommend that the Fund’s ethical investment policy is revised in the light of contemporary thinking that widens the scope of fiduciary duty.

2. Divestment: To recommend that full or partial divestment from fossil fuels is pursued with a proportion of that investment redirected to renewables and energy demand reduction.

3. To recommend that the proportion of the fund devoted to local investments is increased by a specific amount and the strategy for selecting such investments is renewed to assess whether it is robust enough to support environmental and local economic benefit.

4. To recommend that the Fund should actively support community owned renewables development in GM, that a statement of intention is published and a contact process for projects seeking funding is established.

In summary, our view is unchanged. Local government pension funds are relatively transparent and accountable players in the world of investment and finance. But that transparency and accountability is relative, obscured by layers of bureaucracy and delegation of responsibilities. While some of that is inevitable in a multi-million pound enterprise, we still need to call for greater transparency and accountability to the real interests of people and planet for a viable economy in Manchester and beyond. For that reason we reiterate our calls for a more ambitious approach to investment selection and management that meets socially and environmentally responsible criteria, not least the facilitation of a rapid decarbonisation of the economy and investment in projects locally that build real prosperity that stays in the region, while not damaging the living planet we depend upon.

Update, October 2015.
The council’s minutes of the meeting record the following conclusion:

To recommend that that GMPF re-evaluate their responsible investment framework
in the light of current economic conditions and to highlight on a local level the
investments have been made and their economic and environmental benefits. To
request that Councillor Akbar take these recommendations forward.

The Fund has conducted a consultation on their investment policy but as yet we do not know the outcome.  See also later posts about the fossil-free divestment campaign and GMPF.