Lothian Pension Fund has shied from divesting its fossil fuel holdings, citing the costs associated with such a move.

Responding to calls from the City of Edinburgh Council to investigate the costs, benefits and feasibility of either partially or wholly divesting, the £5.1bn (€6.9bn) fund raised concerns over the cost of divestment and the potential loss of returns.

It is not the first fund to consider divesting from carbon-heavy sectors – last year, the Environment Agency Pension Fund argued that divestment was neither industry-leading nor progressive.

Despite this, the Government Pension Fund Global was recently ordered to sell all companies that derive more than 30% of earnings from coal. 

Lothian noted that, depending on how fossil fuel companies were defined, either 29 or 19 of its shareholdings – equivalent to £151m or £113m of its portfolio – could be subject to divestment.

“While the precise impact of divestment from fossil fuel companies is unknown, certain costs are guaranteed, and the overall impact could be significant,” it said.

It estimated that the one-off cost of selling its fossil fuel holdings would be as much as £2.5m.

It also cited the additional ongoing compliance cost of ensuring no companies regarded as fossil fuel firms re-entered its portfolio.

In the report ratified at its most recent pension committee meeting, which accompanied an annual review of its Statement of Investment Principles (SIP), the fund also noted that the recent review of fiduciary duties by the Law Commission had shown that financial returns should be the “predominant concern” of pension trustees, even if they were allowed to take account of non-financial matters.

“To the extent that divestment reduces the fund’s investment return in the future as compared to one that retains the ability to invest in the shares of fossil fuel companies, there is risk to the employer contributions,” the report adds.

“Such an occurrence could be challenged – for example, by employers and/or taxpayers – to whom the financial burden would fall. This is a significant risk for the funds.”

However, the fund said it would continue to incorporate environmental, social and governance (ESG) concerns into its investment approach.

It also noted its backing of the “Aiming for A” resolution, which saw BP, Shell and Statoil agree to disclose how they would adapt to a future low-carbon economy.

It said divestment would remove its access to company management and fail to change the level of fossil fuels consumed on a global level.

“Divestment results in shares being sold to other investors, who may be less concerned about climate change and less inclined to engage with management to change behaviour for the better,” it said.

Lothian also stressed its commitment to low-carbon investments by highlighting both its exposure to sustainable timberlands and the growth of its renewable energy holdings, which account for more than one-quarter of its £268m infrastructure portfolio.

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