Everything you need to know about local government to campaign for divestment
Local government – our borough, city and county councils – invest over £14 billion in the fossil fuel industry through local government pension schemes.
When campaigning to divest this money from fossil fuels, it’s important to understand how the investments are made, and who has control over these.
where’s the money?
Money in local government is held in several different places, and the money controlled by any particular authority will depend on the level of local government, the size, and the set-up of local government in the area.
The vast majority of investments managed by local councils take the form of workers’ pension funds under stewardship, though councils will also have bank accounts and cash reserves.
Through these pension funds, local governments invest workers’ money in fossil fuels.
These investments are usually managed on a day-to-day basis by an external fund managers, but investment policy is set by the pension fund’s administering council, usually through a Pensions Committee made up of a few councillors.
Research released in September 2015 revealed that local government pension funds invest over £14 billion in the fossil fuel industry through direct holdings in companies and through commingled funds.
This is equivalent to just over 6% of funds on average, however this exposure varies greatly, with funds investing between 1.5% and 11%. Three-quarters of direct investment is in just 10 companies – including Shell, BP, and most major companies involved in coal mining.
Councils will also hold money in cash and bank accounts, however, these are relatively small amounts in comparison to pension funds, and there are limited options for moving this money. Find out more about this by clicking these boxes:
Local governments receive income from various sources such as government grants and council taxes, and borrow additional funds for infrastructure works. They will often receive funds at a different time from when they need to spend them, and surplus cash may be ‘invested’ to maximise its value until it is needed. These short-term deposits held by local governments are called cash reserves or treasury investments / deposits.
Surplus cash in this form (totalling £41bn for the combined 468 UK local governments) isn’t invested directly in equities (such as fossil fuel companies) but deposited with a variety of UK, US and EU based banks, building societies and money market funds.
There’s an “approved counterparties” list of organisations that receive council deposits in the council’s Treasury Management Strategy decided each year (you can find yours here).
While these cash reserves are not directly invested in fossil fuel companies (see campaign demands for clarity on this), the banks, building societies and money market funds that hold the cash reserves do invest in shares of fossil fuel companies, and financial products which are “exposed” to fossil fuels. Move Your Money have shown that the ‘big 5’ banks have £66 billion in fossil fuels.
Local governments have any number of bank accounts which they use for transactions such as receiving council taxes and parking fines, and paying for staff wages and building rents.
Given the relatively small amounts of money involved, characterisation as a service rather than an investment and the obstacles stopping local government from changing their bank account providers (since the Cooperative Bank withdrew from service provision, the majority rely on just four UK banks: HSBC, Barclays, RBS (including Natwest) and Lloyds (including Bank of Scotland)), transactional banking is not likely to offer fertile ground for divestment campaigning.
who controls the funds?
There are 100 local government pension schemes across the England, Scotland, Wales and Northern Ireland.
Pension funds are usually administered by ‘top tier’ local government such as county councils. However this isn’t always the case – in metropolitan counties, district/city councils administer the fund on behalf of others unitary authorities (e.g. West Yorkshire Pension Fund is administered by Bradford Council). Some counties also defer management of the fund to others (e.g. Lincolnshire County Pension Fund is managed by West Yorkshire).
In Northern Ireland, all local government pensions are managed by a single authority, the Northern Ireland Local Government Officer Superannuation Committee (NILGOSC). London is also different as most boroughs run their own pension funds, but some are administered by London Pension Fund Authority (LPFA), which also holds its own separate fund.
Pension fund investments are usually managed on a day-to-day basis by an external fund manager, but investment policy is set by the pension fund’s administering council. The pensions committee act as de facto trustees of the fund and so are accountable to fund members – those whose pension is part of the fund. It is this committee which has the power to set divestment policy.
The exact setup of local government will vary from place to place, and you’ll need to do some research on your local situation when planning your campaign. These are a few key groups to think about when mapping out power structures.
Councillors are public servants who are elected to represent you and your community. They are typically elected as members of political parties or as independents. It’s councillors who can pass a motion for divestment and (in most cases) pension fund committees are predominantly made-up of councillors.
Approaching them, building their support and applying pressure from constituents will be important. It’s easy to find your local councillor, just enter your postcode here. Councillors can also pass motions through ‘full council’ – while this wouldn’t necessarily guarantee a divestment commitment, it would put significant pressure on the Pensions Committee.
In some places there may be ‘Party Group Leaders’ co-ordinating the members for a particular political party – they can also be important to target for building cross party support.
The Pension Fund Committee acts as a board of trustees for the pension fund and includes elected local councillors and, often, representatives of fund members (such as council workers).
They make long-term strategic decisions and must approve changes in investment strategies. The committee members aren’t financial professionals, and will lean on advice from the council officers and external fund managers. However, ultimate responsibility for fund management and direction does lie with them.
Specific committees (with cross-party councillor representation) will be responsible for areas of local government linked to finance, with a cabinet member (the councillor appointed to have ultimate responsibility over these areas) at its head.
Fund managers do most of the day-to-day management of funds and may be employed by the Fund or externally contracted. They are consulted on and give advice around financial decisions, so have a huge say on issues such as divestment, but are not ultimate decision makers on top level investment strategy.
Fund managers are also responsible for engaging with companies on behalf of asset owners (i.e. local government) and scrutinising their voting record.
Sadly external fund managers may advise trustees that divestment is impossible or unwise (and that they’re doing a very good job thank you very much). It’s worth noting however: fund managers aren’t necessarily up to speed on carbon risk, and are a mile off taking this issue seriously.
While pension trustees may trust their fund managers financial advice, they are sometimes slightly resentful of the enormous fees levied by external companies for their services and wary of being ‘fleeced’, and their understanding of carbon risk may be an interesting issue to raise. Competition between fund managers is intense, and raising ShareAction’s Asset Manager Survey for ‘Responsible Investment Performance’ may be useful.
Paid council officers are answerable to the whole council and are responsible for advising cabinet members and committees, and for implementing councillors’ decisions.
The councillors with responsibility for finance are likely to look to the Finance Officer (sometimes called the 151 Officer) for advice. Local government officers can make decisions about how the pension fund is managed and recommend governance changes to the fund’s oversight committee.