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Environment Agency Pension Fund

PRI reporting framework 2020

You are in Strategy and Governance » Investment policy

Investment policy

SG 01. RI policy and coverage

New selection options have been added to this indicator. Please review your prefilled responses carefully.

01.1. Indicate if you have an investment policy that covers your responsible investment approach.

01.2. Indicate the components/types and coverage of your policy.

Select all that apply

Policy components/types

Coverage by AUM

          Climate Change - TPI Framework
        
          Engaging our stakeholders
        

01.3. Indicate if the investment policy covers any of the following

Other description (1) Commitment that our Fund’s investment portfolio and processes are compatible with keeping the global average temperature increase to remain below 2°C. Now updated the policy - includes base case scenario and the objective to test a number of methodologies - to identify investment portfolio alignment to Paris [had to shorten].

01.4. Describe your organisation’s investment principles and overall investment strategy, interpretation of fiduciary (or equivalent) duties,and how they consider ESG factors and real economy impact.

The Fund revised its strategy in 2019 following its triennial valuation. This built on the healthy funding position and the desire to derisk the portfolio. In doing this, the Fund agreed to move into new asset classes for us where we would seek to new sustainable approaches in particular in multi-asset credit.  

Our fiduciary duty is to act in the best long term interests of our members. To do so properly requires us to recognise that environmental, social and governance issues can positively and negatively impact on the Fund's financial performance and that they should be taken into account in our funding and investment strategies, and throughout the funding and investment decision making process.

The investment strategy remains focused on seeking to get maximum value from our assets within an appropriate level of risk, ensuring environmental, social and governance considerations are fully integrated, and furthering our commitment to responsible investment. It uses multiple levers to achieve this: active mandates, specialist benchmarks, detailed risk analysis, and a fully diversified range of assets across global markets.

[Edited due to word count].

01.5. Provide a brief description of the key elements, any variations or exceptions to your investment policy that covers your responsible investment approach. [Optional]

Our successful financial performance is supported by our deep commitment to investing responsibly and we believe it is paramount in our ability to deliver sustainable, long term returns.

Responsible Investment remains at the core of our fund and it is more pressing than ever as we face a climate emergency. Through our new Responsible Investment Strategy, we demonstrate to our members we have a credible plan to deliver strong long term financial returns as the impacts of climate change materialise. We believe financial risk and opportunities will come from both these impacts, regulation and policy, alongside increased competition from alternatives and technological innovation.

In 2015 we set ourselves the target to maintain at least 25% of our investments in clean technology and other sustainable opportunities across all asset classes. As at 31 December 2018, 39% of our investments were in clean technology and other sustainable opportunities, representing a value of £1.35bn. We also continue to make excellent progress against our climate change related goals, with 11% of the Fund now invested in low carbon, energy efficient and other climate mitigation opportunities.

By integrating climate change into our risk management process, using carbon footprinting, assessing fossil fuel exposure and challenging managers on physical risks, we seek to reduce unrewarded climate and carbon risk. Collaboration is core to how we deliver our approach, well evidenced through the Climate Action 100+ successful engagement with Shell PLC.

This year, we agreed as a Committee to directly engage on our members' behalf with those companies where our assets are invested, to better understand their approach to managing the physical risks of climate change. We're attending selected company Annual General Meetings (AGMs) to ask questions of Boards regarding their climate change performance and future actions.

We have continued to be active in our support for the work of the Task Force on Climate-related Financial Disclosure (TCFD) and we report in line with the TCFD recommendations. Following our launch as co-founders of the Transition Pathway Initiative (TPI) in 2016, we are delighted to see how important a framework it has become for asset owners to assess how companies are transitioning to a low-carbon economy. We only see this increasing in the future.

Being open and transparent about the Fund, its benefits and how we invest is a core principle. Our Board and member representatives actively engage with our members and other stakeholders to ensure the Fund is aware and can respond effectively to all member and stakeholder concerns.

In all the complex decisions we take as a Pensions Committee, we recognise our legal duty to act in the best interests of our members. Our top priority is to ensure that the pensions of our past, present and future members are secure and well managed.

01.6. Additional information [Optional].

          
        

SG 01 CC. Climate risk

01.6 CC. Indicate whether your organisation has identified transition and physical climate-related risks and opportunities and factored this into the investment strategies and products, within the organisation’s investment time horizon.

Describe the identified transition and physical climate-related risks and opportunities and how they have been factored into the investment strategies/products.

When we reviewed our strategic asset allocation in 2019, we modelled the impact of climate change on our portfolio for both transition and physical risks. We did this through Mercer's Investing in Climate Change: The Sequel

We estimate from our modelling that our portfolio is relatively well positioned to benefit from the opportunities presented by a low carbon transition and withstand the financial risks from climate change. We also know that keeping to a 2ºC scenario or lower, is most beneficial from a long term investor perspective, as there are likely to be less physical risks to our investments. We will continue to monitor this.

For the first time in 2019, we also asked our actuaries, Hymans Roberston to consider the impact of climate change into our future liabilities as part of our triennial evaluations.  We continue to work with them to develop this model. 

 

01.7 CC. Indicate whether the organisation has assessed the likelihood and impact of these climate risks?

Describe the associated timescales linked to these risks and opportunities.

10 and 35 year time horizons. 

01.8 CC. Indicate whether the organisation publicly supports the TCFD?

01.9 CC. Indicate whether there is an organisation-wide strategy in place to identify and manage material climate-related risks and opportunities.

Describe

In October 2019 we launched our new Responsible Investment Strategy. 1 of our 3 priority areas is:

We invest to build a better future by:

• investing significantly in sustainable and low carbon assets

• calculating the impact on, and impact of, our fund on climate change

• exploring opportunities for investing responsibly in all asset classes and in particular in fixed income

1.10 CC. Indicate the documents and/or communications the organisation uses to publish TCFD disclosures.


SG 02. Publicly available RI policy or guidance documents

 

02.1. Indicate which of your investment policy documents (if any) are publicly available. Provide a URL and an attachment of the document.

URL/Attachment

URL/Attachment

URL/Attachment

URL/Attachment

Other, specify (1) description

          Climate Change - TPI Framework
        

URL/Attachment

02.2. Indicate if any of your investment policy components are publicly available. Provide URL and an attachment of the document.

URL/Attachment

URL/Attachment

URL/Attachment

URL/Attachment

URL/Attachment

URL/Attachment

URL/Attachment

URL/Attachment

Other description (1) We are sponsoring IIGCC work on building a 2 ºC portfolio but we are also testing a number of approaches, including how to assess (and act on) warming potential of our current portfolio.

URL/Attachment

02.3. Additional information [Optional].

We have set the following targets for 2025:

We aim to always have at least 33% of our investments in sustainable assets.

17% of our investments will directly tackle climate change.

We will decarbonise our equity portfolio, reducing our exposure to future emissions by 95% for coal and 90% for oil and gas by 2025 compared to the exposure in our underlying benchmark as at 31 March 2015.

Alongside ensuring we invest well and engage to drive forward responsible investment forward, there is a third major pillar to our approach – our beneficiaries and making them proud of, and engaged with, their pension fund.  We have undertaken a member survey which received over 2 500 responses (a 14% response rate). 69% of our members believe that climate change will present a financial risk to investments in their lifetime. For those aged 25-35, this was 82%. Over 80% of our members want us to:

invest in sustainable and low carbon assets; and
change the behaviour of the wider financial community; and
influence the behaviour of individual companies we invest in

On the above 3 questions, for those aged between 25-35 the support was well over 90%. In the year ahead, we will work with those 550 people who have asked to take part in focus groups on responsible investment.  We will also seek interesting and innovative ways to engage them in our work.


SG 03. Conflicts of interest

03.1. Indicate if your organisation has a policy on managing potential conflicts of interest in the investment process.

03.2. Describe your policy on managing potential conflicts of interest in the investment process.

Declaration of conflict of interests is a standing agenda item at the start of all Pensions Committee and Investment Sub Committee meetings. A public register of Pension Committee members' declaration of interests is also maintained and audited annually. The need to avoid conflicts of interest is also highlighted in our investment management agreements (IMAs) and contracts with external parties.

We have further reinforced (with financial penalties) our approach in relation to direct investment where the sponsor may have a regulatory role.

 

03.3. Additional information. [Optional]


SG 04. Identifying incidents occurring within portfolios

04.1. Indicate if your organisation has a process for identifying and managing incidents that occur within investee entities.

04.2. Describe your process on managing incidents

Fund managers are required to monitor and report on incidents that occur within portfolio companies as part of the IMA. In addition we have a dedicated person who uses publications and other sources to identify incidents, escalating them internally if needed. Fund managers will be alerted to the incident and we track it until the incident is resolved.

As mandates transition to the Brunel Pension Partnership they will fall under the Brunel processes for identifying and managing such issues. EAPF belongs to a number of client groups that have helped develop these processes.
 


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