The Pensions Committee of Tower Hamlets Council met on Tuesday 22 September 2020 to discuss responsible investment strategies, fund performance, and pension fund accounts. Key decisions included the permanent adoption of the Voluntary Scheme Pay discretions policy and noting the unaudited 2019-20 pension fund accounts.

Responsible Investment and Fund Development

The meeting provided an extensive update on London CIV's^[1] responsible investment initiatives and product pipeline. Jason Fletcher, Head of Client Services, and Jacqueline Jackson, Head of Responsible Investment, outlined their work in enhancing transparency, listening to client needs, and developing new investment products.

Significant progress has been made in establishing a responsible investment function, driven by client demand and an evolving regulatory landscape, including the Principles for Responsible Investment (PRI) and the UK Stewardship Code. London CIV is now a signatory to the Taskforce on Climate-related Financial Disclosures (TCFD) and is reviewing climate data providers and proxy voting services. A new Responsible Investment Manager is being hired to bolster analytical capacity.

Several funds were highlighted:

• Renewables Fund: This fund, aiming for 100% investment in renewables, is moving into phase three of development, with over £400 million in investment interest. An advisor is currently being selected to help choose fund managers, with a view to potential commitments by the end of the year.
• London Fund: This fund, in phase two of development, will focus on infrastructure and property with an impact angle, aiming for both financial returns and positive social and environmental outcomes. It is being developed in partnership with the Local Pensions Partnership (LPP) and is seeking additional investors.
• Low Carbon Equity Fund: This passive equity fund with a low carbon tilt is being developed, with input sought from those with existing experience in this area, such as Miriam.
• MAC Fund: An update was provided on the transition of the MAC fund from a single manager (CQS) to a multi-manager structure to mitigate single manager risk and enhance robustness. The selection of a second manager is underway, with a key factor being the underlying managers' approach to responsible investment.

Councillor Wood raised concerns about the perceived lack of cost savings through bulk purchasing and staff efficiency, questioning the ongoing strategy of investing with London CIV. Jason Fletcher assured the committee that developing products, staff, and communication is a top priority to build trust and demonstrate the value of their strategy.

Investment Performance and ESG Considerations

Goldman Sachs presented on their approach to ESG (Environmental, Social, and Governance) integration in fixed income portfolios. Claire Headley and Jonathan Orr highlighted two key themes: climate transition (e.g., clean energy, waste management) and inclusive growth (e.g., affordable education, healthcare). They emphasised that ESG is core to their business and must be anchored in an investment framework.

Councillor Wood questioned the process of selecting ESG exclusions, particularly regarding defence spending and the potential for political choices. David Bartell from Goldman Sachs explained that while they have the tools to build portfolios in various ways, including exclusions, the focus for many clients is increasingly on climate change alignment and Paris Agreement initiatives due to less contention. He noted that while exclusions can reduce the investable universe, their fees would not necessarily increase for incorporating such ideas. The discussion highlighted that ESG integration can be an iterative process, with clients often starting with a set of exclusions and expanding over time.

Councillor McQuillan inquired about the potential for working with Goldman Sachs to be a leader in infrastructure and renewable investments, seeking more independence than currently offered by London CIV. David Bartell explained that their expertise in these areas lies in private markets, offering custom private market portfolios designed around themes like clean energy. He noted that this approach can provide access to opportunities with potentially higher returns and impact reporting.

Jonathan Orr, Lead Portfolio Manager, provided an update on the performance of the fixed income absolute return bond fund, stating that it had ended the previous year up 4.48% net and was up 3.3% year-to-date net. He attributed this strong performance to a diversified portfolio across various fixed income sectors, including corporate bonds, high yield bonds, and inflation trades.

Pension Fund Accounts and Voluntary Scheme Pay

Miriam, presenting on the pension fund accounts for 2019-20, stated that the unaudited accounts were being presented for noting. She confirmed that the audit had commenced and expressed optimism that it would be completed in time for the annual reports. Kevin highlighted ongoing issues with the council's general fund and main statement of accounts, emphasizing that clearing the pension fund audits would be beneficial. The committee was recommended to note the unaudited 2019-20 pension fund accounts.

The committee also considered the Voluntary Scheme Pay discretions policy. Miriam explained that the policy, initially adopted for a six-month period, allowed for selected scheme members, primarily high earners or those with significant years of service, to have their tax charges paid by the fund. This policy was now being proposed for permanent adoption. The review of the 2017-18 and 2018-19 accounts identified members with tax charges, and statements for 2019-20 were being prepared. The policy has impacted a mixed range of members, not just high earners. Councillor Wood asked about the approximate number of people impacted, with Miriam detailing that for 2018-19, 38 members received a report, and 16 had a tax charge, while for 2019-20, the process had reduced the initial 6,000 active members to around 40-50 for detailed review. Mr. Bartell stressed the importance of approving this policy to avoid inequity for staff. The committee voted to adopt the policy permanently.