Interview | Doug McMurdo
LAPFF is a membership organisation con- sisting of 80 individual local government pension schemes (LGPS) and six pool com- panies, so it is inevitable that our members will sometimes have different perspectives on issues. We are a member-led organisation, so we aim to form consensus on issues amongst our members. What this means in practice is that we usually engage with companies based on the number of members with shareholdings. So we focus on those com- panies that mean most to our members to protect their interests. We engage on important responsible investment issues for our members. We try to build consensus around issues by listen- ing and engaging with members regularly on major issues. By working together we have a much stronger voice to ensure that directors are acting responsibly for the long-term benefit of the company and our beneficiaries.
To what extent has engagement changed as a result of LGPS pooling? To be honest, there has not been any real change in the way LAPFF engages since the advent of pooling.
Our role remains the same – to engage with companies on responsible investment con- cerns to ensure long-term returns. That matters for our pool members just as it does for individual member funds. In this sense, the forum exists to provide a collective voice, louder than it would have if we act as individual members or pools. Over the past few years membership has grown considerably as have the assets under management of members to around £250bn. This makes the forum a powerful force to shift the agenda in the right direc- tion, engaging companies and taking a lead on important responsible investment issues.
Is it fair to say that investors’ understand- ing of ESG has broadened, starting with factors which directly affect the financial industry, such as auditing standards and executive pay to broader issues like climate change and gender equality?
I am not sure; ‘ESG’ has always covered a broad range of issues. I would agree, how- ever, that some people’s interpretation has been about narrower definitions of what might impact investment value. For LAPFF, we have always taken a broad view of how such issues affect shareholder returns. For example, climate change is a massive issue for our members and has been for some time. We started engaging on corporate carbon disclosure back in 2002, published our first report on the investment implications of climate change in 2004 and have engaged with companies on carbon risk management for many years.
Our work on executive pay and auditing standards has been long standing, and the same goes for gender equality. We were engaging with UK-listed companies back in 2006 on equal pay audits. I would like to think that in many instances, where LAPFF leads, others follow.
Besides talking to companies, LAPFF also engages with the government through pol- icy consultations. Which topics are cur- rently high on the agenda?
One of the biggest victories for the forum has been the establishment of the new Audit, Reporting and Governance Authority (ARGA). We have long called for a regulator with teeth. The previous set up was a classic example of regulatory capture. There were too many senior voices from the accountancy industry, which is never a good approach. We hope to see some changes with ARGA scrutinising the quality of audits to raise standards and become a strong authorita- tive capital market regulator. The work on this continues. At the moment there is a lack of competition in the audit- ing sector with the big four dominating. In many cases companies can only choose between one or two auditors, which is not the mark of a functioning market. We will continue to engage with policymak- ers to improve regulation in this regard.
The fallout of a potential no-deal Brexit could have significant consequences for LGPS funds, yet the topic is highly divi- sive. How do you handle that? Views on Brexit are seriously diverse in the forum as they are in most walks of life. Our approach has been to engage with company chairs on what it means for them and what planning they have in place. It has been a topic in many engagements with discussions covering management of skills and immigration to the impact on trade and supply chains.
These discussions are likely to continue for the foreseeable future. If and when we leave the EU, the companies with whom we engage could face UK trade negotiations which will cover the same issues. Of course, we don’t get to decide govern- ment policy but can engage with compa- nies on the effectiveness of their prepara- tions and securing the best outcomes for beneficiaries.
With yield curves reversing, there is again growing talk of another recession. Has the industry learned some lessons from the last crisis? Where do you see room for improvement?
One of the lessons of the 2008 crash was that the numbers some companies were presenting to shareholders were not accu- rate. This was particularly the case for banks.
There has been some progress and the cre- ation of ARGA set on a statutory basis is what LAPFF had been calling for, for more than 10 years.
Although this is something to be wel- comed, we still have concerns about the auditing industry. Similar concerns have been highlighted by the Competition and Markets Authority (CMA). In relatively stable economic times, we have seen major failures – at Carillion, for example. As Warren Buffet has said: “It is not until the tide goes out that we see who has been swimming naked.” Sadly, too often we have to wait until there is a recession before that emerges.
22 | portfolio institutional | September 2019 | issue 86
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