How we helped our client gradually reduce their exposure to fossil fuel risks

After being prompted by member queries about the DB pension scheme’s fossil fuel investments (FFI) exposure, we helped the trustees understand the risk and manage it over time.

The background

The trustees wanted to understand the financial and reputational risks of FFI - for example, shares in oil, gas and coal companies.

FFI could be seen as inconsistent with the sponsor’s organisational values, so FFI posed a reputational risk that could damage the sponsor covenant.

Our solution

We advised on the risk that FFI could become 'stranded' and suffer a large fall in value due to climate policy.

Our high-level analysis of the scheme’s eleven investment funds found that:

• four funds had limited exposure to FFI
• four funds had FFI exposure but were illiquid or had diversification benefits
• three funds with FFI exposure were identified for review

We helped the trustees draft a policy for responding to member and external queries about FFI.

The results

Our analysis allowed the trustees to better understand their FFI exposure.

They decided to make a gradual move out of the three funds identified for review, as part of a plan to reduce their allocation to return-seeking assets. This meant that FFI risk exposure would be reduced gradually over time with minimal effort.

The policy allows the trustees to be ready to respond to any queries they receive about FFI.