Although a major risk to the future of our economy, the time scale over which climate change will affect our lives is, in the main, beyond the short-term focus of professional investors.

This means that investors seeking to secure their funds for the long-term need a climate change plan which ensures those managing money on their behalf don’t carry on with a business-as-usual approach.

A number of major investors, including local councils, have such a plan.

Eight Scottish universities and churches and five UK local government pension funds have committed to cut their investments in fossil fuels, part of a global movement of over 800 investors with combined assets of $6 trillion USD.[1] Many have also pledged to increase investment in projects which benefit their local communities.

We will detail three local government pension funds that have made strong commitments to act on climate change, and discuss what councils here in Scotland are doing to respond.

Waltham Forest, London

Waltham Forest was the first UK council to commit to divest its pension fund from fossil fuels. Photo by Matt BrownIn September 2016, the London Borough of Waltham Forest Pension Fund became the first UK pension fund to commit to fully divest from fossil fuels.

The fund’s new policy states that it will “exclude fossil fuels from its strategy over the next five years”. They will also invest more in wind energy and local infrastructure.

The policy received the full backing of the Conservative and Labour councillors who sit on the Council’s Pensions Committee.

Councillor Simon Miller, chair of Waltham Forest Pension Fund said: “Not only does this mean that the fund will not be invested in stranded assets, but will be actively investing in cleaner, greener investments to the benefit of our community, borough and environment.”[2]

The Fund’s Statement of Investment Principles (SIP) will be changed to enshrine this commitment. In 2017 the pension fund was valued at £765.

Over the winter of 2016/17 Waltham Forest’s victory was followed by divestment announcements in the nearby councils of Haringey and Southwark, and London’s new Mayor Sadiq Khan is pressuring the London Pension Fund Authority to cut its fossil fuel investments.[3]

Environment Agency Pension Fund

In October 2015, the Environment Agency Pension Fund, part of the local government scheme, announced it would end most of its investments in fossil fuels within the next five years.

The announcement was made with the publication of a new investment policy for the fund, which outlined a goal of ensuring the fund’s investments and processes were ‘compatible with keeping the global average temperature increase to remain below 2°C relative to pre-industrial levels.’[4]

The Fund has around 40,000 members and was valued at £3.2 billion in 2017.

The policy included three targets to be achieved by 2020:

  • Invest 15% of the fund in low carbon investments.
  • Decarbonise the fund’s shareholdings in coal by 90% and oil and gas by 50%.
  • Support progress towards a transition to a low carbon economy by working with investors, fund managers, companies, researchers, and political leaders

This new approach reinforces past efforts by the fund to invest responsibly. In 2015 the fund invested £280 million in a new Legal & General fund that follows the MSCI Low Carbon Index, a list of companies that don’t invest in coal, major oil companies and other fossil fuels, reducing carbon exposure. The fund also invests £19 million in a ‘Low Carbon Workplace Fund’ which lends to energy efficiency programmes for commercial buildings.

South Yorkshire

In November 2015 the South Yorkshire Pension Fund committed to low carbon investment policy that excludes ‘pure’ coal and tar sands companies with “a long term tilt towards a low carbon economy within its portfolios”.[5]

The fund was valued at £7.5 billion in 2017. In 2015 they published a responsible investment policy and in March 2016 an accompanying ‘Climate Change Policy‘, stressing that the fund will continue to engage with fossil fuel companies but also that “consideration will be given to reducing exposure to high-carbon intensity companies that fail to respond to engagement by not demonstrating a decrease in carbon intensity or carbon risk… Over time endeavour to manage a tilt within portfolios in favour of lower carbon assets in-line with the Paris Agreement, with a view towards progressively decreasing the Fund’s carbon exposure.”[6]

What are Scottish councils doing?

No Scottish councils have made a public commitment to divest and reinvest. To find out how they were dealing with climate change issues we asked them questions about what they were doing to make their pension funds sustainable.[7]

Less than half of the funds asked had discussed how climate change would affect their fund (Lothian, Tayside, Strathclyde, Fife and Falkirk). Orkney said they had discussed the issue but later admitted they had no written evidence to prove this.

Three funds had produced reports on the issue (Lothian, Tayside and Strathclyde). Tayside’s is very short and simply states the fund’s investments in fossil fuels and some of the arguments for and against divestment. Lothian and Strathclyde’s reports are more detailed, but focus on the very short-term practical costs of changing their policy: a thorough assessment of the scale of climate change risks to the fund is lacking.[8]

At the time of asking (December 2016) none of the councils said they had adapted their investment approach in response to the UN treaty signed in Paris.

Instead of seeking to move away from the companies most responsible for causing climate change many funds stated that a policy of engagement was adequate. This entails investors discussing concerns with companies they invest in, and putting pressure on companies to change their business practices. Scottish councils paid external contractors £258,258 to engage with the companies they invest in on their behalf in the 2015-16 financial year. This figure is almost certainly an underestimate as Strathclyde, the largest fund, refused to tell us how much they spent, claiming commercial confidentiality.[9]

We also asked funds if they had consulted their members about climate change and fossil fuel investments. We found that only two funds: Tayside and the Scottish Borders, had consulted their members about anything in the last 10 years, and neither of these two consultations addressed climate change.[10]

Several councils told us they are members of the Carbon Disclosure Project (CDP) and/or Local Authority Pension Fund Forum, and some have signed the UN Principles on Responsible Investment. Strathclyde have recently joined the Institutional Investors Group on Climate Change and we have recently learned that they are investigating the carbon footprint of their portfolio.

Is enough being done?

Given the scale of the threat posed by climate change to the wider economy, investors like pension funds, who have a stake in the future health of the economy, should be working as hard as possible to both limit the risks posed by climate change to their investments, and to limit climate change full stop. Only by pursuing both of these strategies can fund members and the general public be confident that councils are securing their pension funds for the future.

It is therefore deeply concerning that the majority of the funds are yet to even seriously discuss climate change at board level.

Most of those that have discussed climate change have produced reports on the issue and carried out internal training: a normal procedural response in identifying risks. Carbon footprinting is to be welcomed, but it is likely that this tool will only identify companies which are high users of fossil fuels rather than focus attention to those which supply fossil fuels.

Of those few councils which have discussed climate change we are concerned that the actions they have resolved to take does not meet the scale of the problem.

Those funds that have discussed climate change were confident that the money they spend on engaging with the firms they invest in was effective in limiting their exposure to the risks associated with climate change. There are a number of problems with this approach:

  1. Companies carrying out engagement on climate issues believe that fossil fuel companies can be discouraged from extracting fossil fuels. More often than not this has shown to be false. Oil, gas and mining companies are specialised, short-term profit driven, and in the main not providing leadership on moving away from dirty sources of energy.
  2. Companies will only take engagement seriously if they believe you may withdraw investment from them. By continually espousing engagement as the only strategy for dealing with risks, pension funds are giving irresponsible companies a free hand.
  3. Our experience suggests that there are many in the financial industry who do not believe that climate change poses serious risks. Responsible investors should be wary that the short-term focus of the financial industry discourages serious consideration of issues like climate change, and that some may be using engagement as a sticking plaster for the industry’s current inability to cope with long-term challenges.

Endless discussion and engagement with fossil fuel companies will do little to change their behaviour whilst leaving the pension fund exposed to the risks of the carbon bubble and other associated risks.

We are encouraged that three funds Scottish funds are investing directly in infrastructure like social housing and renewable energy. However, the positive benefit these investments are having could be significantly amplified if they were part of a joined-up strategy to tackle climate change.

Scottish councils should take a lead from the funds discussed in the case studies above by making a commitment to divest from fossil fuels over five years and reinvest in environmentally and socially beneficial infrastructure in their local communities.

A timed policy of divestment from fossil fuels has the following benefits:

  1. Divestment protects pension funds from climate change risks by cutting out companies most unfit for the future.
  2. By making an example of the companies contributing most to climate change, divestment encourages wider action to limit climate change and the economic havoc it will bring.
  3. As public bodies councils have a legal duty to contribute to Scottish action on climate change. The way these duties relate to pension investment are narrowly defined (see A look at the law) but still material, and could be strengthened in the future.
  4. Many councils have already made commitments to invest responsibly. Divestment would fulfil this commitment and enhance the existing engagement they practice by showing companies that they take these issues seriously.
  5. Divestment could free up funds held in stocks and shares to reinvest in useful projects that benefit the local community.

We would recommend that councils incorporate a policy of divestment and reinvestment in their Statement of Investment Principles, a mandatory document that describes their investment strategy.[11]

What if councils ignore climate change?

If councils do not act boldly on climate change it will be harder for the rest of us to cut carbon emissions and build a sustainable society.

If councils do not develop the policy and expertise to invest more in beneficial local projects, Scotland will miss out on the opportunities that this investment could bring.

Furthermore, councils that do not take this issue seriously risk losing significant fund value and face the possibility of a legal challenge.

The Bank of England has advised that funds may face “both regulatory and shareholder action if they fail to adequately consider, misrepresent or conceal climate change-related risk”[12] and a 2016 legal opinion concluded that if it could be shown the climate change had financial implications for funds, taking no effective action would be in breach of their legal duties.[13]

Funds could also face charges of intergenerational inequity: if fossil fuels are being retained due to their strong performance in the very short-term at the expense of longer-term risks, this would be unfairly benefitting older members over younger members.

Ignoring climate change won’t make it go away. If as time passes investors continue with business as usual the risk of financial and environmental catastrophe will only grow.


[1] Campaign group 350 maintain a list of organisations that have divested from fossil fuels at

[2] Source:

[3] Source:

[4] Source:

[5] Source:

[6] Source:

[7] Links to source material obtained by Freedom of Information Requests is available on request.

[8] In 2015 the City of Edinburgh Council and Glasgow City Council passed resolutions at full council meetings that called for a report to set out the feasibility, costs and benefits of introducing a partial or complete fossil fuel divestment strategy for the Lothian Pension Fund and Strathclyde Pension Fund respectively.

[9] This total breaks down as follows. Fife: £86,000, Lothian: £76,000, Tayside: £44,433, North East: £31,825, Falkirk: £20,000. Dumfries and Galloway, Highland, Orkney, Scottish Borders, and Shetland spent nothing on engagement. Strathclyde refused to say.

[10] The Tayside Pension Fund consulted their members about divesting from tobacco companies in 2013 (source 1, source 2). The Scottish Borders Council asked their members about what their broad approach should be on responsible investment in 2010 (source 1, source 2).

[11] For more information about best practice contact the Friends of the Earth Scotland at

[12] Source:

[13] Source:

The authors are very grateful to Louise Montgomery for their work in developing this research.