A major investigation by the Sunday Herald reveals that public sector pension funds are supporting more than a hundred big corporations blamed for wrecking the climate, causing cancer and profiting from conflict.
Amongst the groups backing major climate polluters is the government’s Scottish Environment Protection Agency (Sepa), which champions moves to cut climate pollution. Amongst those funding big tobacco are health groups, cancer hospices, schools and universities.
Two public pension schemes are putting millions of pounds into an electronics company that has been shunned by other public investors because it makes controls for US military drones accused of illegally killing more than 400 civilians in Pakistan, Yemen and Somalia.
The revelations have shocked trade unionists, pension-holders and campaigners, who are now calling for a major overhaul of public investments. “Many people work in the public sector because they want the world to be a better place,” said Dr Richard Dixon, director of Friends of the Earth Scotland.
“They will be appalled to find out the scale on which their money is being used to fund climate change, big tobacco and arms companies. Whether it is health workers or those working for the environment, in many cases funding these companies directly conflicts with the aims of the organisations offering these pensions.”
“This research demonstrates all too clearly why council pension governance is in urgent need of reform,” he said. “It is simply absurd to invest huge sums of public and workers’ money in companies whose aims are incompatible with public policy objectives.”
Many of Scotland’s public sector pensions are administered by five local authorities in Glasgow, Edinburgh, Aberdeen, Dundee and Falkirk. Together they invest £23 billion on behalf of more than 400,000 individual members from 435 public bodies, including 25 local authorities, universities, government agencies and voluntary groups.
Until now the companies in which they invest have been hidden, so that pension-holders didn’t know where their money went. Now, however, using freedom of information law, the Sunday Herald has uncovered where the money goes – and it’s not a pretty picture.
In 2013 the five pension schemes were investing £1.11 billion in fossil fuel companies, £204 million in tobacco and £113 million in arms. The biggest beneficiaries, netting over £100 million each, were the cigarette giant, British American Tobacco, the coal and metal mining company, Rio Tinto, and the oil multinational, Royal Dutch Shell.
Other fossil fuel corporations given multi-million pound backing included BP, Exxon Mobil, Chevron, the firm formerly know as Enron, EOG Resources, and the world’s largest coal mining company, China Shenhua Energy Company. Others in the top 20 recipients were the cigarette makers, Imperial Tobacco and Philip Morris, and the arms manufacturers, Rolls Royce Holdings and Lockheed Martin (see table below).
Almost £15 million went to the UK defence company, BAE Systems, despite its record of selling weapons to countries with poor human rights records. It sold 200 armoured vehicles to Saudia Arabia, which used them to help suppress pro-democracy protests in Bahrain in March 2011.
The biggest pension fund, covering Strathclyde and run by Glasgow City Council, invested £545 million in 71 fossil fuel companies, three tobacco companies and three arms manufacturers. It involves 215 public bodies including councils, colleges, housing associations, mental health groups, the Loch Lomond and Trossachs National Park Authority and Greenspace Scotland.
Lothian pension fund, run by the City of Edinburgh Council, invests £345 million in 53 fossil fuel companies, six arms companies and five tobacco firms. Its 101 public bodies include Heriot Watt University, the august Royal Society of Edinburgh, community groups and a care home for cancer patients, St Columba’s Hospice.
The North East Scotland pension fund, involving a sports trust and health groups, put £229 million into fossil fuel, tobacco and arms companies, including £3 million for Ultra Electronics, a UK firm which made components for US drones. Included in the £197 million invested by the Tayside pension scheme is another £3 million for Ultra Electronics.
The Falkirk pension fund, which involves Sepa and Strathcarron Hospice, had investments of £87 million in 14 fossil fuel companies in November 2013 – a third more than in November 2012. In 2013 it also gave £23 million to tobacco companies and £5 million to BAE Systems (see tables below).
Tobacco and arms companies have long been avoided by some major investors, and now a growing international movement has persuaded a Norwegian pension fund, Storebrand, and the Dutch bank, Rabobank, to withdraw from fossil fuel companies. Edinburgh University and the Church of Scotland are also reviewing their investments, and look likely to steer away from fossil fuels (see article below).
Last week the United Nations climate chief, Christiana Figueres, told big investors in New York that they should pull out of fossil fuels. Scientists say that up to three quarters of the coal, oil and gas must stay in the ground if the world is to avoid climate chaos.
The American writer and environmentalist, Bill McKibben, who helped launch the “fossil-free” investment campaign across Europe and in Edinburgh last October, argued that fossil fuel investments would become worthless when the “carbon bubble” burst.
“Once you've looked at the numbers, there’s no way to escape the conclusion that this industry is now an outlaw industry,” he said. “Not outlaw against the laws of the state – they generally have a large hand in writing those – but outlaw against the laws of physics.”
News of Scotland’s public sector pension investments saddened McKibben. “It's such a tragedy to see this level of shortsightedness,” he told the Sunday Herald. “It just doesn't make sense to pay for one’s pension by investing in companies that make sure we won’t have a planet to retire on.”
The environmental group, WWF, has launched a global campaign under the banner ‘Seize Your Power’ urging financial institutions and governments to switch their investments away from fossil fuels to renewables.
“Many staff in these organisations will be shocked to learn that their pensions could be helping to fuel climate change and damage the environment – some of the very things that they are working hard to prevent,” said WWF Scotland director, Lang Banks.
The oil industry stressed that it contributed £6.5 billion to UK tax revenues last year, and that the UK accounted for only two per cent of climate pollution worldwide. “Climate change policy should focus on moving progressively from high-carbon coal to lower-carbon natural gas, not only on the increased use of renewables,” said a spokeswoman for the industry body, Oil & Gas UK.
The discovery that Sepa is part of a pension scheme that invests heavily in oil and gas will upset many of its staff. They point out that the environment agency has successfully reduced its carbon emissions and played a major role in helping the Scottish government do the same.
Dr Janet Moxley, a former senior climate change scientist with Sepa, expressed disappointed that Sepa had failed to shift its pension investments to businesses that benefit the environment. This contrasted with what Sepa’s sister agency in England and Wales, the Environment Agency, was doing, she argued.
She said: “Most Sepa staff are passionate about the protecting the environment, and many try to make sure that their own savings are invested ethically, but all this is undermined if the pensions scheme is invested in activities which damage the environment.”
According to Mary Church, head of campaigns at Friends of the Earth Scotland, Sepa’s pension investments were going in exactly the wrong direction. “Sepa exists to protect and improve the environment, yet through its pension scheme staff and public money are helping oil companies drive climate change to the brink,” she said.
Sepa pointed out that its staff could opt out of the pension scheme if they wanted to. The scheme had social, environmental and ethical policy principles, a Sepa spokesman said.
“Sepa is keen that the scheme takes account of environmental considerations in its investments, and as a member we have made representation to the scheme to encourage that approach,” he added.
The £204 million backing for big tobacco came under fierce fire from anti-smoking groups. “Councils, the police, the fire service and others are all tasked with looking after people’s well-being,” said the chief executive of ASH Scotland, Sheila Duffy.
“This doesn’t sit easily with investments in tobacco companies, who sell an addictive product that kills half of its long-term users.” Because the number of smokers was declining, withdrawing tobacco investments could make sense financially as well as ethically, she argued.
The Tobacco Manufacturers’ Association, which represents UK companies, insisted that tobacco was a “legitimate industry” in which people could invest. “Fund managers should be free to make the best financial decisions for their investors,” said an association spokesman.
The Campaign Against Arms Trade branded the £113 million support for weapons manufacturers as “alarming”. Public money was often put into these companies without the knowledge or agreement or contributors or the public, it maintained.
“The arms trade is not a legitimate industry and should not be treated like one,” said campaign spokesman, Andrew Smith. “It is a business whose main purpose is to profit from oppression, global insecurity and conflict.”
The business association representing arms companies, Aerospace Defence Security, did not respond to requests to comment last week. Local authority pension fund mangers, however, insisted that they took their social responsibilities very seriously.
But they pointed out that fund managers had a “fiduciary duty” to obtain the best return on investments to protect pensions and the public purse. They also said that they were influencing companies by actively engaging with them, rather than by withdrawing investments.
Clare Scott, who manages the Lothian pension fund, appreciated people’s concerns, but warned that excluding particular companies could limit funds’ income. She hoped that a current UK review of institutional investment would clarify how ethical investments could be made.
A spokesman for the Strathclyde pension fund pointed out that its investments in the low carbon economy were growing, with £82 million committed last month to “major public infrastructure developments”.
Ethical investment can make money, say experts
Public sector pension funds do not have to invest in dangerous products like weapons, tobacco or fossil fuels in order to earn a decent rate of return, say investment experts.
There is now a burgeoning ethical investment business that claims that it can outdo conventional operators, and give investors a better deal for their money.
Ryan Smith, head of corporate governance with investment managers, Kames Capital, pointed out that its £1.2 billion ethical equity fund had earned an 18.3 per cent rate of return over five years. This compared to a 14.6 per cent return from its fund involving all UK companies.
“The investment performance of the Kames funds suggests that it is possible to offer an ethical product with comparable long-term investment returns,” he said. “Sometimes the ethical restrictions work against us, but sometimes they can provide a tailwind.”
The failure of Scotland’s pension funds to invest more ethically was “a little frustrating,” Smith argued. It was “disingenuous” for groups to invest in a way that was at odds with their objectives.
According to Julian Parrott, a partner at the Edinburgh investment firm, Ethical Futures, there had been a significant increase in the amount of institutional money being invested ethically over the last 10-15 years. “This money has driven the growth of responsible and sustainable investment,” he said.
This focused on the businesses that had low impacts on the environment or human health. “These are what you might call industries of the future, rather than the old dirty industries that many fund managers still seem wedded too,” he said.
“On matters of strong conviction I feel that public sector schemes should be much more active participants in the ownership of shares and should make a bit more noise about what they are doing – with the ultimate sanction being divestment from a company.”
The launch of the United Nations principles of responsible investment backed by 68 international investors in 2006 gave a major boost to ethical investment. The first university in Europe to sign up to the scheme was the University of Edinburgh, which this month began a consultation with its staff, students and benefactors to review its investment policy.
The university has refused to invest in tobacco companies since 2003, and last year withdrew £1.2 million from Ultra Electronics, a UK company that makes controls for lethal US drone strikes. “Our approach to investment must balance a desire to consider social responsibility with a need to generate an income,” said the university’s sustainability director, Dave Gorman.
“The very purpose of the university seeks to promote public good so it is vitally important that the endowment funds we possess are maintained for the benefit of future generations.”
The Church of Scotland’s ethical investment policy, agreed by its General Assembly, forbids investments in companies “substantially involved in alcohol, armaments, gambling and tobacco products.” It is now coming under pressure from within the church to withdraw from fossil fuels as well because of the damage they do to the global climate.
“We are in discussion with a group of young people from Dalgety Church in Fife who have petitioned the Church of Scotland to divest from fossil fuel companies,” said Rev Sally Foster Fulton, convener of the Church and Society Council.
The church was also in discussions with churches in England, the USA and elsewhere, she added. “The Church and Society Council will consider a draft recommendation to investigate divestment from fossil fuel companies at its meeting later this month and, if agreed, will present this to the General Assembly in May 2014.”
One pension-holder’s view
Matthew Crighton (60) has been getting an income from the Lothian pension fund since he retired from the job of managing Edinburgh’s jobs strategy for the Capital City Partnership in 2011. He doesn’t approve of where his money is being invested.
“I’m distressed that the pension fund is putting our money into businesses like this,” he said. “The oil industry is associated all over the world with environmental damage and suppression of human rights – you only have to think of Shell in Nigeria or Chevron in Ecuador.”
BP’s Deepwater Horizon disaster in the Gulf of Mexico in 2010 showed that the fossil fuel industry is “pushing exploration for new reserves beyond safe limits,” he argued. “They now want to frack our countryside, when it’s well known that we should be keeping fossil fuels in the ground to avoid dangerous climate change.”
According to Crighton, pensions for public service workers should be supporting enterprises that promote public wellbeing. “Pension fund officers always claim that their fiduciary duties prevent them from picking out investments which don’t harm the planet or get into bed with repressive regimes,” he said.
“But actually I understand that’s not true - it just requires them to get a good long-term return. So if there is evidence that dumping the dirty shares and actively pursuing investments in more ethical and sustainable industries will give reliable returns, then I think they should.”
Where Scotland’s public pension funds are invested
British American Tobacco / £121m
Rio Tinto / £110m
Royal Dutch Shell / £110m
BP / £92m
BG Group / £78m
BHP Billiton / £64m
ENI / £39m
Tullow Oil / £37m
Exxon Mobil / £36m
Imperial Tobacco / £34m
Chevron / £32m
EOG Resources (formerly Enron) / £30m
Philip Morris / £30m
Petrofac / £27m
Rolls Royce Holdings / £26m
Centrica / £24m
Lockheed Martin / £24m
General Electric / £21m
Chesapeake Energy / £21m
China Shenhua Energy Company / £20m
Other fossil fuel companies / £369m
Other tobacco companies / £19m
Other arms companies / £63m
Total / £1.43 billion
The public sector investors
Involves 215 public bodies, including 12 local authorities, University of Strathclyde, Glasgow School of Art, Scottish Water, Scottish Enterprise, First Bus, Creative Scotland, Scottish Qualifications Authority, Visit Scotland, Loch Lomond and Trossachs National Park Authority, Greenspace Scotland, housing associations, charities, theatres, mental health groups and other voluntary agencies.
Major investments (as at 13/11/13)
Rio Tinto / £56m
British American Tobacco / £33m
Exxon Mobil / £31m
BP / £26m
BG Group / £25m
Tullow Oil / £25m
Chevron / £22m
Chesapeake Energy / £21m
China Shenhua Energy Company / £20m
Lockheed Martin / £19m
Other fossil fuel, tobacco and arms companies / £267m
Total / £545m
Involves 101 public bodies, including four local authorities, Convention of Scottish Local Authorities, Heriot Watt University, Edinburgh College of Art, Queen Margaret University, Royal Society of Edinburgh, Museums Galleries Scotland, mental health groups, community groups, Children’s Hospice Association Scotland and St Columba’s Hospice.
Major investments (as at 31/3/13)
Royal Dutch Shell / £48m
BHP Billiton / £32m
BP / £32m
British American Tobacco / £30m
Rio Tinto / £20m
Centrica / £12m
BG Group / £11m
Imperial Tobacco / £11m
Rolls Royce Holdings / £9m
ENI / £8m
Other fossil fuel, tobacco and arms companies / £132m
Total / £345m
Major investments (as at 31/10/13)
Other fossil fuel, tobacco and arms companies / £78m
Total / £229m
Involves 45 public bodies, including three local authorities, University of Abertay, colleges, schools, voluntary groups and others.
Major investments (as at 30/9/13)
Royal Dutch Shell / £16m
BG Group / £15m
Rio Tinto / £14m
British American Tobacco / £14m
Rolls Royce Holdings / £13m
Imperial Tobacco / £12m
BP / £9m
BHP Billiton / £7m
Enquest / £6m
Ultra Electronics / £3m
Other fossil fuel, tobacco and arms companies / £88m
Total / £197m
Major investments (as at 1/11/13)
Other fossil fuel, tobacco and arms companies / £26m
Total / £115m
sources: Strathclyde, Lothian, North East, Tayside and Falkirk pension funds
The information released by the pension funds can be downloaded by clicking on the following links: Strathclyde pension fund (344KB pdf); Lothian pension fund (79KB pdf); North East pension fund (22KB pdf); Tayside pension fund (36KB Excel); Falkirk pension fund (264KB pdf).