Investing responsibly – a poolside view

20 Feb 2020

Frances Deakin, head of responsible investment at LPP Investments

With the eyes of the investment community having been on Davos, and its sustainability agenda, stewardship is now mainstream for all fund houses and none more so than the local government pension scheme (LGPS) asset pools. Frances Deakin gives the LPP view.

Any discussion of significant ESG and responsible investment issues for the LGPS should register capacity as a material concern. This reflects a general evolution underway in expectations of effective stewardship, which is informing a revision of regulations and good practice 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 management and UK defined benefit (DB) pensions provision converge. Pools are subject to multiple currents simultaneously. Climate change is a catalyst placing stewardship 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 protecting the long-term interests of their members. Where previously ESG was a fringe consideration, now it is coming into the mainstream as an integral part of investment risk management. 

At the same time, collectively the bar is being raised on what constitutes responsible investment and good stewardship. Compliance is moving away from boxticking to a focus on transparent reporting, objective approaches to assessing risk and disclosure on actions taken and outcomes achieved. These new standards are re-orienting the questions beneficiaries, stakeholders and commentators are asking of funds.  

As investors in the global economy, pension funds flag up as at risk from value destruction through asset stranding and physical damage or destruction. Their long-term investment horizons also suggest they can be at the forefront of providing the capital needed to transition to a sustainable future. This new paradigm for stewardship is directly connecting 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 references market shaping and broader societal 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 intermediaries 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 challenges, LPP Investments has built out its responsible investment team. The addition 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 monitoring, new requirements on FCA-regulated asset managers and best practice standards (UK Stewardship Code, Principles of Responsible Investment) which demand detailed reporting. 

The perspective for pension funds is that stewardship is now the deep end of fiduciary responsibility.

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

2) Other new duties include those under the Occupational 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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