LGPS funds are facing growing public pressures over their investments in companies that might benefit from the conflict in Gaza.
The latest council meeting agenda for Powys County Council on 7 March appeared to offer nothing out of the ordinary: a proposed rise in bus fares, complaints about the infrequency of rubbish collections and plans for a new recycling centre in the Crickhowell area. But in between these regular agenda points, the Middle East made it onto the agenda.
Powys, like many councils and cities across the UK, has been witnessing protests demanding an immediate ceasefire in Gaza. The issue was brought on the agenda by Liberal Democrat councillors Pete Roberts and Richard Church, who urged the fund’s Pension Investment Committee to withdraw any investments in the armaments industry and minimise exposure through pooled investments. The International Court of Justice in the Hague is currently investigating whether Israel’s military operation in Gaza constitutes a Genocide.
The Welsh fund is by no means the only one facing public pressures. A recent pension committee meeting by Haringey Council was also targeted by protestors.
The campaign group Palestine Solidarity Campaign (PSC) says that some 63 of the 86 LGPS funds hold investments in companies with exposure to the conflict, totalling more than £4.6bn in assets. PSC’s list ranges from companies like Airbnb and Booking.com, who are accused by the campaign of renting out properties on illegal settlements over banks financing such settlements, to arms manufacturers such as Lockheed Martin and BAE systems who are delivering weapons used in Israel’s attack on Gaza.
Anti-BDS bill
But efforts to divest LGPS assets are being met with legal challenges. The Department for Levelling Up, Housing and Communities (DLUHC) is putting forward a bill which would effectively outlaw divestments from firms with exposure to the conflict.
DLUHC says the Economic Activity of Public Bodies (Overseas Matters) bill, which is expected to reach Royal assent later this year, prevents public bodies from being influenced by political or moral disapproval of foreign states when taking economic decisions unless they are aligned with government policy.
While the bill could in theory apply to divestments from any state, in practice, it is particularly aimed at preventing boycotts targeting Israel. Indeed, Israel, the Occupied Palestinian Territories and the Golan Heights are the only potential divestment targets specifically mentioned in the bill.
And while it to all public bodies, including local government investments, it is most likely to impact the LGPS who hold globally diversified portfolios in equities and bonds.
The new bill has been met with scepticism from human rights campaigners, who warn that it restricts local democracy, freedom of expression and undermines campaigns for social justice. They are also warning that it could be used as a blueprint to crack down on much wider campaigns, for example by the fossil fuel industry.
Fiduciary challenges
This raises new challenges on fiduciary duty for the LGPS. While the administering authority usually delegate responsibility for managing the investments of the fund to a pensions or investment committee, councillors take collective decisions around asset allocation. This raises several questions, as the Local Government Association has pointed out. For example, should the onus for compliance be with the funds or the pools? And could the pools be inadvertently liable for non-compliance with the bill due to investment decisions taken by the pools?
Another issue is to determine the motivation of investment decision makers. Lothian Pension Fund, Tayside Pension Fund, and Falkirk Council Pension Fund have all divested from the Israeli Bank Hapoalim between 2019 and 2021; this is cited by DHLUC as an example of divestment. But the LGA challenges DLUHC’s view, stating that these did not constitute active boycotts.
“Instead, they are examples of standard commercial decisions made by asset/investment managers who are actively managing pension fund money under a high-level agreement with their LGPS client,” the LGA said.
Political risk as financial risk
Two pools, London CIV and Brunel Pension Partnership, have also expressed concerns about the bill as written evidence to the Houses of Parliament at the end of last year. Alongside the uncertainties on fiduciary duty, Jacqueline Jackson, head of responsible investment at London CIV, and Faith Ward, chief responsible investment officer at Brunel, pointed out that the bill’s attempt to crack down on investment decisions taken on “moral or political” grounds could be challenged by the fact that these terms were highly subjective.
In their evidence to parliament, Jackson and Ward emphasise that political risks often come with financial risk. For example, the value of the Israeli stock market fell by more than 7% in the wake of the Hamas attacks in October, though the index has since recovered.
Israel’s credit rating has also been downgraded to A2 by US rating agency Moody’s in February over the ongoing violence in Gaza. So far, this has not yet impacted bond issuance. The Israeli government has raised $8bn from a debt issuance in early March; this year it plans to raise an additional $52bn to fund the invasion of Gaza, the Financial Times reported.
More widely, Jackson and Ward explained that it is normal for LGPS funds to be lobbied on political issues and public opinion is generally taken on board as part of a wider analysis. “Decisions to invest in, or divest from, should be based on a holistic analysis of financially material issues. Issues raised by boycott or divestment campaigns may be integrated as part of this analysis.”
Moreover, there is also a fundamental contradiction for signatories of the UK Stewardship Code, they argue. As signatories, they are expected to prioritise “investment decision-making, monitoring assets and service providers, engaging with issuers and holding them to account on material issues, collaborating with others, and exercising rights and responsibilities”.
“The UKSC explicitly recognises that asset owners play a key role as guardians of market integrity, working to minimise systemic risk yet the public reporting it requires could be construed as making statements,” they warn.
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