The £4.5bn East Sussex Pension Fund, a UK local government fund which is part of the ACCESS Pool, has voted not to divest from its existing fossil fuel holdings following a heated debate at its latest pension committee meeting on 25 September.
Committee members discussed three proposals put forward by Green Party councillor Georgia Taylor and Lib Dem councillor David Tutt, which called for the fund to divest from fossil fuels across equities, bonds, and private markets. However, the committee voted 3 to 2 against each of the proposals, highlighting the complexities of divesting from fossil fuels within pooled investment vehicles.
Councillor Taylor emphasised the importance of the vote’s symbolic power. “Having a divestment commitment in place is really important, not least to deliver on our policy of keeping our emissions to a 1.5-degree target for global warming, but also to ensure that the whole idea of investing in organisations that extract additional fossil fuels is being stigmatised,” she stressed.
The vote followed a process of more than two years, during which the fund explored the prospect of selling its fossil fuel assets held within pooled structures. The fund commissioned consultant ISIO to produce a detailed report on the implications of fossil fuel divestment across the portfolio.
The report, produced in September last year, highlighted both the scope of East Sussex’s exposure to fossil fuel assets and the financial and logistical challenges of divesting specific assets within a pooled fund structure.
“We don’t have segregated mandates, so we would have to sell the entire manager and go through a procurement exercise to appoint a new segregated manager to guarantee that we will not have managers with exposure to fossil fuels in future.”
As of March 2023, the fund held £151.9m—just over 3% of its total assets—in fossil fuels, much of it through investments in infrastructure or private equity vehicles. Because the fund’s holdings are in pooled structures, divesting from individual assets proved challenging, as explained by Sian Kunert, head of pensions at East Sussex Council:
“We don’t have segregated mandates, so we would have to sell the entire manager and go through a procurement exercise to appoint a new segregated manager to guarantee that we will not have managers with exposure to fossil fuels in future.”
Divesting from fossil fuels would also significantly reduce the fund’s investments in renewable energy assets, which are often included in the same investment vehicles. For instance, East Sussex is invested in IFM’s Infrastructure Fund, a private equity vehicle that invests in clean energy but also has $67m of fossil fuel exposure. Similarly, its exposure to thermal coal includes investments in Orsted, one of the world’s largest renewable energy companies.
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An immediate divestment would have come at a considerable cost to the fund. An impact assessment produced by the chief finance officer estimated that immediate divestment from all fossil fuel assets would have cost the fund £79m due to transaction and procurement costs, along with an £18m shortfall in returns.
However, councillor Tutt and Andrew Singh, head of Public Sector Investment Advisory, argued that these costs could be significantly reduced by phasing out divestment over five years. The financial impact assessment also noted that current market valuations of fossil fuel assets do not accurately reflect the associated financial risks.
With the proposals rejected by a majority of the committee, a two-year debate on divestment has, for the time being, been put to rest. However, given East Sussex’s commitment to aligning its portfolio with the Paris Agreement targets and the considerable public interest in fossil fuel divestment, the issue may well resurface in the future.
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