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East Sussex County Council - 12 October 2021
Questions From Members Of The Public

5. Question from L Holden

Pension Fund members are no doubt pleased to see that the East Sussex Pension Fund (ESPF) has gradually started to disinvest from some of the more controversial companies that have been in its portfolio, such as oil and armaments companies. This has been through the movement of funds to ESG (environmental, social and governance) entities Storebrand Global ESG Plus, WHEB Sustainability Fund and the Wellington Global Impact Fund. These constitute approximately 20% of the Fund's equity allocation. That means that the ESPF has 80% of its funds that do not take into consideration ESG factors. So clearly there is more work to be done before the ESPF can be said to adhere to its Statement of Responsible Investment Principles which states: "RI (Responsible Investment) is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and to generate sustainable, long-term returns (according to Principles for Responsible Investment)?"

There are moves within the investment industry to take a serious response to companies that supply the Israeli military and/or are complicit in Israel's illegal settlement industry. This has come about because of the recent Human Rights Watch report which concluded that Israel is guilty of the crimes of both apartheid and persecution. The HRW report shows that these are crimes against humanity which "stand among the most odious crimes in international law." It calls for sanctions, travel bans, even prosecutions against "those credibly implicated in the crimes of persecution and apartheid...."

It is as a result of this report that the London CIV (Collective Investment Vehicle) has drawn up a list of its investments in companies that are complicit in Israel's crimes. London CIV is the asset pooling company involved with 32 London Local Authority pension schemes with £11.2 billion of assets.

The CIV has stated that it will "commit to engaging with investee companies" and has stated that it is prepared to use "escalation measures if required." This can mean divestment.

In the CIV's list are 17 companies that are in the East Sussex Pension Fund. Some of these are armaments companies which provide Israel with the means to bomb the Palestinian population. The Pension Fund has more than half a million pounds invested in one of these companies: Northrop Grumman. This company supplies the Israeli Air Force with the Longbow missile delivery system for its Apache helicopters and with laser weapon delivery systems for its fighter jets. So when Israel targets homes, schools and hospitals in blowing up and incinerating men, women, children and babies - it is only made possible by firms such as Northrop Grumman. And by its investors. For the record, there are more than 20 companies that supply the Israeli military in the ESPF.

There are other recent developments on this issue. Norway's largest pension fund KLP - which manages £69 billion of assets - has just announced it has divested from 16 companies because of their links to Israel's illegal settlements economy. Also, Lancaster City Council has recently passed a motion calling on Lancashire Pension Fund to divest from companies active in illegal Israeli settlements or that supply weapons to Israel.

Clearly there are other agencies that are taking this seriously. Will the ESPF, in conjunction with its associates, follow the lead of these organisations? Will the ESPF implement screening and due diligence procedures to pinpoint investments in companies that are complicit in Israel's violations of international law? Are you prepared to carry out "escalation measures if required" including divestment? Will you adhere to the ESG principles that are stated in your Responsible Investment Principles?

The ESPF has, or is about to, take a position in the Baillie Gifford Global Alpha Growth Fund. There are no indications to suggest that it is an ESG fund. This fund follows the MSCI ACWI Index. This index has numerous armaments companies which supply the Israeli military such as Northrop Grumman, Honeywell, Raytheon, Lockheed Martin, Elbit and Thales. It also has oil companies such as Exxon Mobil and Chevron. Has the ESPF carried out due diligence procedures to ascertain whether this fund has incorporated ESG factors?

We are moving into a situation similar to the 1970s and 1980s where there were large moves to divest from companies complicit in South Africa's crimes of apartheid. The difference now is that people generally are more in tune with how their pension contributions are used. Hopefully the ESPF can work in the interests of its contributors and recipients on this issue and become on the right side of history.

Response by the Chair of the Pension Committee

The Pension Fund investment strategy is published on the Fund's website which explains the asset allocation of the portfolio, which includes a wide range of assets to diversify risk to protect our members' pensions. The Fund does not invest solely in shares. The 20% noted in the question is in relation to a decision to invest specifically in impact equity funds and the Fund's new smart beta passive fund. All investment managers have screens when structuring the underlying portfolios and have large responsible investment teams to carry out research in each underlying asset or company. The Fund invests its portfolio through investment managers and not as direct holdings. The Pension Committee papers from September 2021 can be found on the Council's website which discusses the ongoing implementation of its investment strategy into a resource efficient product and the Baillie Gifford Paris aligned fund, these changes are still being implemented and much of the exposure to companies relating to this question will drop out of the portfolio once complete. The Pension Committee has previously made a statement relating to occupied territories which can be found on its website. Environmental, Social and Governance (ESG) is taken into account in all investment decisions as outlined in the Statement of Responsible Investment Principles and the Fund carried out an impact assessment of the ESG capabilities of each of the Fund's investment managers in July 2021, with the aim of considering these assessments when performing future stewardship or ESG activity and for future reference if considering future investment strategy changes. This impact assessment will be updated and reviewed annually to track where managers are making changes to improve the stewardship of the portfolios. The investment work plan in the Committee papers shows ESG work streams that are planned over the next 12 months.

Supplementary question from L Holden to Pension Fund Committee chair Councillor Fox

This question involves the Pension Fund and its investments in companies that are complicit in Israel's violations of international law and its human rights abuses of the Palestinian people.

This relates to the London CIV and how it deals with this issue - The London CIV is the asset pooling company which oversees London Local Authority pension schemes with £11.1 billion of assets.

Because it has accepted the findings of Human Rights Watch which states that Israel is guilty of the crime of apartheid and persecution, the London CIV has gone further than the East Sussex Fund's position of just investigating companies on the United Nations list which are complicit in the illegal settlement industry; it's policy is that it will disclose and list its exposure to all the accused companies and engage with them, with the possibility of using escalation measures including divestment. The list includes all the armaments companies which provide Israel with the means to bomb the Palestinian population. There are at least 20 such armaments companies in the East Sussex Fund. Will the East Sussex Fund follow the London CIV's lead?

Answer from Pension Fund Committee chair Councillor Fox

Thank you for your question. The short answer to your question is no because the London CIV is organised in a different manner to East Sussex. Our managers have the answer which has been provided to you is very clear about how our managers are selected, what ESG filters or the the fact that they must all have ESG filters and I really can't add any more to this issue. It's very very difficult. I appreciate that if we were to actually have our own segregated portfolio and actually directly owned our own equities it would be easier. I know that London CIV don't directly own their own equities but the way the fund is currently structured is I'm afraid the way it is, and what we do is we engage, we have a Statement of Responsible Investments, we insist that all of our fund managers that we select have rigorous ESG filters and so there is very little I can do beyond that. Clearly engagement takes place via LAPF and that probably is the substantive organisation through which engagement takes place with companies associated with the UN list. And that's afraid all I can say.