Responsible Investment

Overview and background

The LPFA has a long-standing commitment to responsible investment (RI). Our proactive approach to addressing environmental, social and governance (ESG) issues in our investment strategy has been developed over a number of years and continues to evolve.

The LPFA has a particular focus on investment opportunities arising from ESG issues, the integration of RI considerations into our investment decision-making, fund manager monitoring and collaboration with other pension funds.

Our approach and achievements were recognised in 2011 when the Fund was shortlisted for the FT-IFC Sustainable Asset Owner of the Year Award.

This section of our website is the main platform through which we provide our members and other interested stakeholders with details of our RI activities. As a result we try to keep it up to date. If you have any comments or questions please email us at: communications@lpfa.org.uk

Principles, Beliefs and Objectives

The LPFA’s investment decisions are informed by its Investment Principles and its Investment Beliefs. These are reviewed and approved regularly by the Board. Both are set out in our latest annual investment report (PDF 2MB - opens in new window)

The Investment Principles are included here as they provide the foundation of our approach to RI:

Investment Principles

Given the duration of our liabilities, we are responsible long-term investors
We wish to encourage environmental, social and corporate governance best practice in the companies in which we invest, as we believe this will deliver the best long-term returns

Responsible Investment Beliefs

Building on the above Principles a set of RI Beliefs has been developed. Our RI Beliefs provide us with a guiding framework for RI decision-making and help us to articulate why we are focusing on ESG issues alongside other investment factors. They are as follows:

ESG issues are often not captured by the traditional investment appraisal process (i.e. in determining risk and return expectations) but can have a material impact on long term investment returns
ESG issues are not relevant to every asset class or mandate but where they are, evaluating ESG portfolio risks is a prudent addition to the long-term investor’s investment process and is aligned with fiduciary duties
ESG issues can create attractive investment opportunities across asset classes and investment styles
A proactive approach to evaluating ESG risks and opportunities is more likely to result in long term benefits for the fund

The Board reviews these beliefs regularly along with its main Investment Beliefs to ensure they continue to reflect our knowledge and experience in this area.

RI Objective

What does this all mean in practice? Our objective is to use our influence as a large institutional investor to encourage responsible long-term behaviour in the companies in which we invest and through the mandates we give to our fund managers – the way that we implement this is set out below.

As set out in our Investment Principles and RI Beliefs the Board believes that this approach will deliver the best long-term returns and there are benefits from being proactive.

The Board is also mindful of its fiduciary duty to obtain the best possible financial return on the Fund’s investments within a suitable degree of risk, but believes that a focus on ESG issues is entirely consistent with this duty.

Implementing our approach

Our RI activities can be broadly divided into Investments and Integration.

The former relates to investment mandates awarded to fund managers, the selection of which is the same as any other mandate i.e. based on a specific need and subject to an assessment of the risk-reward profile, diversification benefits and liability-matching benefits etc.

The latter is more comprehensive – and as a result complex – as it cuts across all of our activities from awarding and monitoring investment mandates to dealing with our custodian and other agents, and collaborating with other investors. As set out in our statement in support of the Stewardship Code, this is a major, long-term project and we are still in the early days of it.

Investments

Our main investment objective is to ensure that over the long-term the Fund has sufficient assets to meet all pension liabilities as they fall due.

With this in mind the Board has built up a series of profitable investments where ESG issues are central to the investment strategy. Whilst it wasn’t our goal at the outset we now have one of the highest allocations to ‘ESG assets’ of any pension fund – around 7% of our total assets under management.

These investments - which cut across listed and private equity, infrastructure and commodities – add diversification by providing exposure to different risk premia as well as the potential for long-term growth in asset values. They currently include low-carbon renewable energy, sustainable forestry, social and environmental infrastructure and closed-loop recycling. The managers of these mandates include the following:

Integration

At the LPFA "integration" is how we try to incorporate the consideration of ESG issues into our investment decision-making. As stated in our RI Beliefs, ESG issues are not relevant to every asset class or mandate but where they are we think it prudent to consider how they may have an impact.

For a fund the size of the LPFA this is a huge challenge. Our Fund has a global asset mix and includes holdings in the equity (shares) of public and private companies, government and corporate debt (fixed income), commodities, currency, commercial property and infrastructure projects. In addition, our assets are managed exclusively by external fund managers.

Our integration activities currently focus on exercising our rights as a shareholder – i.e. voting and engaging with the companies we own – close monitoring of our fund managers and collaborating with other like-minded investors, mostly other pension funds.

Since 2009 we have made significant improvements in this area, largely due to the appointment of an ESG specialist to the in-house investment team with the remit of developing and implementing a new RI strategy. This additional, focused resource has allowed us to focus in much greater detail on the areas outlined above.

For example, a review of our equity fund managers during 2009-10 highlighted that a more consistent and thoughtful approach to voting and engagement was required. In early 2011 we launched a competitive tender, and announced in July 2011 that we had chosen the specialist Robeco to provide this service to the LPFA for a two-year period.

The tender document (PDF 224KB - opens new window), sets out in detail what we were looking for and why (only available as a PDF).

Voting & Engagement Reports

The first voting and engagement report from Robeco is expected at the end of October 2011.

Meeting & Best Practice

A number of ‘soft regulations’ now exist that attempt to encourage a longer-term mindset amongst investors. These guidelines are the basis of investor best practice and are expanding over time – the latest being in response to the 2007/08 financial crisis.

The LPFA does its best to meet best practice in all areas of its operations i.e. in our pension administration business and through our investment activities. The main areas relevant to our RI activities are the following:

UK Stewardship Code – the LPFA's statement of commitment (PDF 74KB - opens new window)(only available as a PDF)
Myners Principles & CIPFA Guidance – Our Statement of Investment Principles (PDF 368KB - opens new window) (see pages 9 & 13-19) contains details of how we are meeting the requirements of the Myners Principles, with reference to the CIPFA guidelines for pension funds. Principle 5 relates to “Responsible Ownership”
UN Principles for Responsible Investment – the LPFAs annual assessment reports are provided in the section on collaboration.

Working with others

In addition to the approach outlined above, and to ensure that we continue contribute to the development of responsible investment best practice across the industry, we are active participants and supporters of a number of collaborative initiatives. These initiatives allow us to pool our influence with other long term investors and achieve more than we could if acting alone. The LPFA is an active member of the following mostly investor-led groups:

The United Nations’ Principles for Responsible Investment (UN PRI)

Our members can read about our progress on the UN PRI in the assessment reports provided below (only available as a PDF):

Note: we are required by the UN PRI to include the following statement when disclosing these reports.

Scores have been calculated based on signatories’ self-assessment and using the scoring methodology approved by the PRI Assessment Group. Although a limited verification exercise was undertaken with a proportion of signatories, responses have not been independently audited by the PRI Secretariat, PRI Assessment Group, or any other third party. Individual results including comparisons to the overall results (quartiles) are indicative and do not imply an endorsement of signatory activity. While this information is believed to be reliable, no representations or warranties are made as to the accuracy of information presented, and no responsibility or liability can be accepted for any error, omission or inaccuracy in this information.

The Local Authority Pension Fund Forum (LAPFF)

The following reports from LAPFF provide an overview of the activities this initiative is involved in (only available as a PDF):

Looking ahead…2011/2012

The appointment of Robeco in the summer of 2011 enabled us to address a significant area of our RI strategy – having a more consistent approach to our voting and engagement activities.

We are now able to focus on other important areas. In particular we will be devoting considerable time and effort to improving our manager monitoring around ESG issues. As highlighted above this is an essential part of our efforts to integrate ESG issues into the investment process as our assets are all managed externally.

A key part of this is clarifying our expectations across our major asset classes and mandates and ensuring that our managers understand what is expected of them. As always we will collaborate with other funds whenever possible.

Communicating with our Members

The LPFA aims to communicate clearly and transparently with its members. We hope that this website provides a useful introduction into what we are doing in relation to the Fund’s RI activities and why.

We also provide an overview of our approach and summaries of our activities in both the Fund’s SIP and the annual investment reports, both of which are available in the publications section of this website.

Our members are encouraged to contact us with any questions they have regarding the Fund’s RI activities. The best way to do this is by email at communications@lpfa.org.uk

In 2010 a number of members contacted us regarding the Fund’s investments in the oil sector. We were happy to respond to these queries and our responses to the two separate enquiries are provided below (only available as a PDF):

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