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Responsible Investment

2010 Tar Sands votes - response to members (PDF 365KB - link opens new window)

Overview and background

This section of the website describes the LPFA’s approach to responsible investment. It clarifies some of the terminology used and sets out our objectives and beliefs in this area. It also briefly outlines how we are implementing our approach to responsible investment.

The LPFA has been considering how environmental, social and governance (ESG) issues affect its investment returns for a number of years. This has included using our asset allocation to invest in clean and renewable energy sources, sustainable forestry and a broad range of companies that are providing solutions to the social and environmental problems that we face.

In 2009 we strengthened our commitment to responsible investment by expanding the investment team to include an ESG specialist. The Investment Manager – ESG is now responsible for developing and implementing the Fund’s approach to responsible investment across the different asset classes we invest in (i.e. equities, bonds, property etc.).

This website will be used to communicate these developments to our members and external stakeholders and will be reviewed regularly to ensure that it reflects our current thinking and activities.

Our approach to responsible investment

It is the LPFA’s objective to use its influence as a large institutional investor to encourage responsible long term investment behaviour. In particular we aim to support and develop best practice on ESG issues in the companies in which we invest, through the mandates we give to our fund managers and by collaborating with other like-minded investors. As set out in our investment principles the LPFA Board believes that this approach will deliver the best long term returns.

In coming to this view the Board is 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.

What does “responsible investment” mean to the LPFA?

The practice of responsible investment is sometimes hindered by the inconsistent definitions that investors attach to it. To provide clarity to our members and other interested stakeholders, we think in terms of the following:

  • Responsible investment (RI): RI takes account of how environmental, social and governance (ESG) issues affect investment returns over the very long term (the time horizon that pension funds are concerned with). It is an umbrella term that refers to the overall approach the LPFA is taking to consider, for example, long term but potentially material risk factors that are not adequately captured by the traditional investment process. RI also considers the behaviour of different contributors to the investment process (e.g. fund managers and consultants) and the extent to which these behaviours support or detract from responsible long term investor objectives (also known as ‘the principal-agent problem’). Identifying investment opportunities arising from ESG issues is another important element of our approach to RI. Ethical exclusions (also known as “negative screening”) are not part of our approach.
  • Environmental, social and governance (ESG): ESG issues and their impact on investment returns are the main focus of RI. These issues cover a very broad spectrum from corporate governance arrangements to environmental management and disclosure; supply chain labour issues to public health; regulatory restrictions on carbon emissions to product opportunities within environmental markets. As discussed in the ‘RI beliefs’ section (below) ESG issues can have a material impact on investment returns over the long term but are often not captured by traditional investment analysis.

Our responsible investment beliefs

In the same way that our main investment beliefs help us to make long term decisions about an uncertain future – for example, how much to invest in each asset class – a set of ‘RI beliefs’ provides us with a guiding framework for decision-making on RI and ESG issues.

These beliefs help us to articulate why we are focusing on ESG issues alongside other common factors in the investment process. 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 will review these beliefs regularly along with its main investment beliefs to ensure they continue to reflect our knowledge and experience in this area.

Implementing our approach

Implementing an RI strategy for a fund the size of the LPFA is a challenge. The Fund’s asset mix is global 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, we use external fund managers to manage the Fund’s assets, so direct communication with our underlying investments (e.g. companies listed on global stock exchanges) is generally conducted by these managers rather than by us.

As a result of this structure it is neither practical nor possible for us to actively engage across all of our investments. Instead, we have adopted a pragmatic approach and will focus our efforts on issues and areas that we think are most likely to result in benefits to the Fund and/or where we feel there are long term risks to be managed.

We continue to build on and improve our RI expertise but our approach currently includes the following:

  • Evaluating the ESG issues that are likely to be material to the Fund
  • Promoting best practice on ESG issues in the companies in which we invest
  • Exercising voting rights
  • Identifying ESG investment opportunities
  • Disclosing our activities and achievements to fund members and other key stakeholders

We address the top three points mostly via our fund managers who have day to day responsibility for exercising voting rights and engaging with the companies in our portfolio. The Investment Team holds regular fund manager meetings to discuss investment strategy, policy, performance and other issues. Where relevant we will also discuss ESG issues in these meetings. However, to ensure that full consideration is given to the discussion of ESG issues we now hold regular ESG-focused meetings with our main fund managers.

The last two points are the responsibility of the Investment Team and fall under implementation of the investment strategy (identifying investment opportunities) and investment communication (disclosing our activities). The former is an ongoing process, but as discussed earlier we have a range of ESG related investments. The latter is a work in progress and one that we are keen to improve on, hence updating this website to clarify our overall approach to RI.

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:

Members can read about our general progress on the UN PRI in the latest assessment report (only available as a PDF):

UN PRI annual assessment 2009 (PDF 123KB - link opens new window)

Also, the following report from the Local Authority Pension Fund Forum (LAPFF) provides an overview of the activities this initiative is involved in (only available as a PDF):

LAPFF annual report 2009 (PDF 914KB - link opens new window)

As we improve this website, more information will be provided on the activities conducted by the above groups and how they contribute to our RI activities. In the meantime, for further information on the various initiatives listed above please refer to each organisation’s website.

2009 review of activities…and where next in 2010?

In 2009 we conducted a detailed review of our RI activities. In particular we wanted to be aware of and understand the gaps between our approach to RI and wider best practice. It was a very useful exercise and helped us to identify our strengths as well as the areas that we could improve on.

For example, whilst this wasn’t our goal when developing our investment strategy we are very proud of the fact that the LPFA has one of the highest allocations of any LGPS fund to mandates where ESG issues are central to the investment strategy (e.g. alternative energy, green infrastructure, sustainable forestry etc.) – this is currently around 6% of our total assets. Most importantly, these investments have performed well.

We are also the only LGPS fund to have a dedicated ESG investment manager, and are an active member of the industry groups listed above.

However, there is always room for improvement, and last year’s review showed us that we could do a much better job of articulating our approach to RI (strategy, policies etc.) to our members. Also, historically we have provided only limited information on the voting and engagement activities of our fund managers and the activities of the collaborative groups that we are part of.

Our first step in addressing these findings has been to update this website to include details of our RI beliefs, approach etc. During 2010 we will continue to address the ‘areas for improvement’ highlighted above and will use this website to communicate developments as they occur.

We hope that our members and other stakeholders find the improvements to our website useful. If you have any comments or questions please email us at: communications@lpfa.org.uk


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