Interview – Lothian Pension Fund


Tell me about your allocation to real assets, which stood at 18% in March last year?


That goes back to what we do. We are a long-term defined benefit scheme that is open. It is my job to ensure that we pay pensions as they fall due, so what we need is low volatility, stable and inflation-linked cash-flows. Infrastructure, in particular, and real assets, more generally, offer long- term cash-flows with inflation protection. If investors are trying to match the char- acteristics of their assets with the charac- teristics of their liabilities, then infra- structure is attractive. That’s things like drainage, energy, biomass and airports. So, we have been in real assets for quite some time.


What are your responsible investment principles? We believe in high levels of stewardship and operating selectively around the companies we invest in. But we are also part of a diversity campaign around women on boards, something which we believe would benefit companies and investors alike. Other initiatives include measuring the carbon intensity of our investments. Perhaps the most significant point at the moment is that we will deny debt to issu- ers which have projects that are not Paris aligned. That also applies to private equity. That is the right stance to take and I hope others will follow us on that.


Would you divest from your existing port- folio companies that do not align their lending practices with the Paris agreement? Today our stance is that we will not sub- scribe to any new debt issuance or pri- mary capital funding, but I would not go as far as to say that we would divest. If you divest from an existing equity holding you lose the right to talk to man- agement. Moving on is something that is easily done but I would rather keep my ticket to the game.


18 | portfolio institutional August 2020 | issue 95


Over the past six months the S, the social aspect of ESG, has become front of mind.


Many FTSE100 firms are not aligned with the Paris Agreement. Divesting from these firms would make it hard to hold passive funds, I imagine? That is right. We spend a lot of time reflecting on our stance and engaging with stakeholders, but when you look at the evidence from academic studies and the examples of engagement we have had, we are comfortable that the right thing is to engage, not divest.


Are you working with other pension funds on ESG issues?


In some cases, we recognise that the direct route is best. If we are a significant shareholder, we will engage directly with management. More often than not, the right answer for us is to work with others.


There are two bodies we work with: The Local Authority Pension Fund Forum (LAPFF) and Federated Hermes [an investment manager]. They have generally been responsive when we file a concern and we have some active engagements that we are meeting through Federated Hermes. Typically, management respond better when there are a hundred shareholders filing a letter and the assets we represent are in the hundreds of billions, rather than just being a single shareholder.


Has cross-shareholder collaboration on engagement increased in the past couple of years?


It certainly has. I receive quite a lot of emails from people who have identified us as a shareholder in a company and are, for example, unhappy with its use of sin- gle-use plastic. It would be easy for us to say we support every ship that passes but the right thing to do is to focus on those areas where we have the most impact. For the investment community at large, there seems to be a significant increase in appetite to engage. People are recognising that


the power of the community is greater than that of only one constituent.


I am cynical here. There is always a lot of publicity around ESG issues ahead of an AGM, but when it comes down to it, share- holders tend to vote with the board. It seems that it is hard to achieve change through engagement.


I recognise what you are saying. In many cases, the trend towards passive investing over the past decade seems to have meant that those who invest passively lose their right to engage and in some cases the manager votes on their behalf. The worst of the worst is when a passive fund’s manager does not vote at all which means you are giving management a free ride. We feel quite strongly about criticis-


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