Lothian Pension Fund – Interview


ing fund managers who are not voting enough. We recently looked quite closely at stock lending practices. We decided to recall all stock that is lent at the time of a vote, which to my mind is not common prac- tice. So, the proof is in the pudding. We are dropping income in terms of the return on stock that is lent to exercise our voting rights.


Interestingly, Japan’s government pension fund, GPIF, announced a similar measure last year. Absolutely. I hope others follow our exam- ple. Stock lending does have some gov- ernance weaknesses. We are pleased to be working with Northern Trust as a partner to vote on all our shares.


One comment I took from March’s PLSA conference was that even passive invest- ing is no longer an excuse to abstain from shareholder engagement. Passive investing has a lot of advantages in terms of cost and diversification. There are people who just see themselves as shareholders, but perhaps that agenda is changing. But you are right, and the PLSA has called that out too.


Coming back to Covid and its impact on the economy, do you think the health crisis has changed the way investors view ESG? It is a fascinating area. ESG is an unstop- pable force in the world. I do not know when exactly the momentum accelerated, but this year it dominates pretty much everything that investment managers do. If you are not demonstrating your ESG credentials you will be called out for it. We are willing to engage on ESG, but it has so far been about the environment, stranded carbon assets and pollution. Over the past six months the S, the social aspect of ESG, has become front of mind. This has shown some crazy things in terms of how companies treat their employees. Thousands of job cuts have


been announced by trusted brands. There are social media campaigns targeting brands that do not help their staff to socially distance and have not put in place safe working practices. Boohoo is now public news. This has shown that you will suffer if you do not ensure safe working practices. That is the power of the S in ESG. But there are also examples of companies that have repurposed their machinery to make personal protective equipment and not charge the NHS for it, or breweries that have made hand sanitiser for carers. So, there are two sides to this. There are companies that are responding almost with the fortitude that will be essential for any recovery and there are companies that are putting profits first.


There is also analysis to come on the extent to which companies drew down on furlough and then paid dividends. As a responsible investor, we will be looking closely at examples of companies that have been taking government money where it has not been required and then granting dividends on the back of that. That will not be widespread, but compa- nies must ensure they are not drawing government funds when it’s not required. Will the E become centre stage again?


Quite possibly, but right now it’s all about the S as far as I am concerned.


Judging by the performance of stock mar- kets, are we on our way to a recovery or do key investment risks remain? We are entering unchartered territory in terms of how an economy recovers after a pandemic. There is significant liquidity support available and governments are aware of the risk of social unrest if we see mass unemployment. We are seeing governments subsidising jobs and that will determine the shape of the market. It is hard to call it out with much certainty but as a long-term equity investor, it does not change what we do. The key risk for us is that we will see higher levels of inflation, which is usually a natural outcome of such a public finance response. And we might be in for a period of lower returns across all asset classes. There are opportunities, too. Who would have thought that people could be work- ing outside of their office in the way they are and that some of these micro enter- prises have come up with digital deliver- ies and online exercise classes? The UK lags other countries in terms of productivity, but maybe the digital infra- structure will stand us in good stead here.


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


Issue 95 | August 2020 | portfolio institutional | 19


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