ESG – Industry view – Local Pensions Partnership


Frances Deakin, head of responsible investment at LPP Investments


INVESTING RESPONSIBLY – A POOLSIDE VIEW


With the eyes of the investment commu- nity having been on Davos, and its sus- tainability agenda, stewardship is now mainstream for all fund houses and none more so than the local government pen- sion scheme (LGPS) asset pools. Frances Deakin gives the LPP view…


Any discussion of significant ESG and responsible investment issues LGPS should


for register capacity as


consideration, now it is coming into the mainstream as an integral part of invest- ment risk management. At the same time, collectively the bar is being raised on what constitutes respon- sible investment and good stewardship. Compliance is moving away from box- ticking to a focus on transparent report- ing, objective approaches to assessing risk and disclosure on actions taken and outcomes achieved. These new standards are re-orienting the questions beneficiar- ies, stakeholders and commentators are asking of funds.


As investors in the global economy, pen- sion funds flag up as at risk from value destruction through asset stranding and physical damage or destruction. Their long-term investment horizons also sug- gest they can be at the forefront of provid- ing the capital needed to transition to a sustainable future. This new paradigm for stewardship is


directly connecting


the a


material concern. This reflects a general evolution underway in expectations of effective stewardship, which is informing a revision of regulations and good prac- tice standards for UK pension funds. The industry is no longer able to dip a toe in this issue. Local Pensions Partnership (LPP), and LGPS asset pooling in general, occupies the nexus of where institutional asset ownership, FCA-regulated asset manage- ment and UK defined benefit (DB) pen- sions provision converge. Pools are sub- ject to multiple currents simultaneously. Climate change is a catalyst placing stew- ardship under a spotlight. Public consciousness of environmental issues is fuelling a more intense focus on pension scheme stewardship than ever before. Directly and through standards like the Taskforce on Climate related Financial Disclosure, questions are being asked about how well funds are protect- ing the long-term interests of their mem- bers. Where previously ESG was a fringe


22 | portfolio institutional February 2020 | issue 90


investment strategy, asset selection and the exercise of ownership responsibilities with critical outcomes for beneficiaries and society as a whole. It is no coincidence that the revised UK Stewardship Code (2020) introduces a definition of stewardship¹ which refer- ences market shaping and broader soci- etal impact.² To comply with the new Stewardship Code, funds have a long list of tasks to complete.


They will need to: articulate their approach; demonstrate how it is reflected in their investment strategy; explain how it is being implemented in practice by asset managers and providers (who are being held to account against appropriate standards); confirm how it is reviewed, monitored and reported on an ongoing basis; and ensure the data needed for transparent communication of measures and outcomes is available on an annual basis.


These are big asks. Success will depend on funds having a strong understanding of their investment


priorities and stewardship objectives, along with tenacity in ensuring that these flow along the long chain of intermediar- ies


involved in advising, formulating,


implementing, monitoring and reporting on their behalf.


Asset pooling adds another link to the investment chain for LGPS funds, but this is not to the detriment of their ability to adapt to the new requirements. In selecting appropriate investment opportunities, overseeing the coming together of pension fund assets within common investment vehicles, working with delegate managers and exercising the ownership responsibilities attached to collective investment arrangements, LPGS pools have already begun to define, support and deliver good stewardship in partnership with funds. To continue to meet stewardship chal- lenges, LPP Investments has built out its responsible investment team. The addi- tion of three dedicated analyst posts in 2019 reflects an investment in the capacity needed to meet current and future demands spanning client support and reporting, risk measurement and moni- toring, new requirements on FCA-regu- lated asset managers and best practice standards (UK Stewardship Code, Princi- ples of Responsible Investment) which demand detailed reporting.


The perspective for pension funds is that stewardship is now the deep end of fiduci- ary responsibility.


1) ‘Stewardship is the responsible allocation, ma- nagement and oversight of capital to create long-term value for clients and beneficiaries leading to sustaina- ble benefits for the economy, the environment and society.’


2) Other new duties include those under the Occupati- onal Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2019 and the Financial Conduct Authority’s Policy Statement 19/13 which implements the Shareholder Rights Directive II as “Proposals to promote shareholder engagement “.


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