Responsible Investment
Responsible investment
LCPF is committed to the long-term responsible investment (RI) of retirement savings on behalf of Fund members.
Responsible investment practices support the delivery of the sustainable returns needed to pay pensions through a focus on identifying and understanding investment risks and improving risk-adjusted returns over the long term.
The Fund’s assets are managed under pooled investment arrangements. As part of pooling, day to day decision-making around the appointment of asset managers, the selection of investment products, and the exercise of ownership responsibilities has been delegated to LPPI. The Fund has set an overall investment strategy and is also involved in investor collaborations that engage with companies, regulators and interest groups on issues that matter to the Fund, but investment selection and ongoing stewardship activities (such as shareholder voting) are managed centrally by LPPI on behalf of the whole partnership. LPPI are monitored by the Fund and held to account for delivering the investment strategy and for implementing RI policy commitments.
Ensuring Transparency
The Fund aims to be as transparent as possible about the approach to responsible investment and the activities which flow from it.
Consideration of RI begins at a strategic level with decisions about which asset classes the Fund will invest in. Whatever the asset class or the sector, it is a clear requirement for the Fund’s asset managers to evaluate material influences which could affect the future value of investments by incorporating environmental, social and governance (ESG) considerations into their analysis. The approach to Responsible Investment including the commitment to ESG integration is set out in the Fund’s Investment Strategy Statement (ISS) which is included as Appendix 7 to this annual report.
A detailed review of the approach to RI was undertaken during 2018 and an updated RI policy for the Fund was adopted in November 2018. The policy comprehensively sets out the Fund’s values, beliefs, approach, and priorities and is a companion document to the Investment Strategy Statement. The policy is included as Appendix 9 to this annual report.
The policy articulates the thinking that shapes the Fund’s approach, its outcome in terms of identified priorities, and the standards agreed with Local Pensions Partnership Investments as provider of investment management services to the Fund. The policy reflects the commitment to fulfilling the responsibilities held as an institutional asset owner and steward of the retirement savings of fund members and their beneficiaries.
Applying high standards
Two main external benchmarks are used to hold the Fund and LPPI to account.
The Fund is a signatory to the UK Stewardship Code (2012) and ranked Tier 1 (highest) by the Financial Reporting Council (FRC) for the arrangements in place to ensure the effective stewardship of the investment portfolio. The Statement of Compliance describes in detail how the Fund complies with the best practice principles encompassed by the Code.
At the end of 2019, the FRC published a revised UK Stewardship Code (2020) which implements requirements under the Shareholder Rights Directive II and sets a much higher threshold for stewardship activity. In line with the FRC’s timeline for new arrangements under the revised Code, the Fund will consider the best approach to demonstrating alignment with the new standard, but it is anticipated that this will predominantly come through LPPI’s reporting on stewardship activities on behalf of the partnership.
The Fund’s approach and requirements are aligned with the commitments investors make as signatories to the Principles for Responsible Investment (PRI). LCPF delisted as a PRI signatory in July 2018 to enable LPPI to begin reporting on arrangements and activities on behalf of the whole partnership. LPP has reported twice since becoming a PRI signatory (most recently in March 2020) and Transparency Reports are accessible from the PRI website describing arrangements in place and giving detailed examples of good practice.
Responsible investment priorities
Two issues have been identified as primary concerns for the Fund as a responsible asset owner:
- Corporate governance
- Climate change
Company fundamentals, including the quality of leadership and broader corporate governance, determine how well positioned investee companies are to accommodate and thrive in response to multiple stimuli (economic, social, political and environmental). LPPI is asked to seek out, invest in, and focus stewardship efforts on promoting well managed and sustainable companies. This involves monitoring and engaging companies to address issues such as excessive corporate pay differentials and to encourage positive behaviours such as fair and just employment practices and transparent disclosure on corporate activities.
The Fund prioritises working in partnership with like-minded investors, and favours collaborative partnerships that collectively gain the attention of companies. As a member of the Local Authority Pension Fund Forum (LAPFF) the Fund is placed alongside 79 other UK local government pension funds. The forum represents and promotes the investment interests held in common and helps maximise joint influence as shareholders. LAPFF activities are supported by attending the AGM and Annual Conference as well as participating in the Forum’s programme of quarterly business meetings. The Chair of the Pension Fund Committee and Head of Fund are members of the LAPFF Executive Committee currently. This reflects a commitment to active partnership with other LGPS pension funds to set high standards, advocate for progressive policy and hold investee companies to account.
In the last 12 months as a member of LAPFF, the Fund was represented in the range of activities undertaken by LAPFF summarised in the tables and graphs below (which are taken from the Forum’s Annual Report 2019).