UK funds lead charge on ESG

The £3.6 billion ($5.9 billion) London Pensions Fund Authority has recently beefed up its internal environmental, social and governance capabilities, resulting in more effective engagement, including with the Mayor of London. Kristen Paech talks to chief executive Mike Taylor about LPFA’s short, medium and long-term objectives for ESG and why the fund has taken matters into its own hands

UK pension funds are leading the charge on responsible investment. The Principles for Responsible Investment (PRI) 2009 progress report revealed UK asset owners are ahead of other signatories on governance, policy and strategy, and received higher scores than their peers from other regions on four of the six principles.

The growing focus on responsible investment has led many funds to hire dedicated environmental, social and governance (ESG) staff, with Universities Superannuation Scheme (USS), Railpen, BT Pension Scheme and the London Pensions Fund Authority (LPFA) just a few examples of funds that are looking internally rather than externally on the ESG front.

Having decided three years ago to build up its internal investment team and appoint a chief investment officer, the LPFA this year hired its first specialist responsible investment manager, Aled Jones, to lead the fund’s ESG work around engagement, corporate governance, voting and the PRI.

Mike Taylor, chief executive of the fund, says the LPFA has aspired to be an active and long-term responsible investor
for some time, and this is enshrined in the fund’s statement of investment principles and strategic objectives.

Jones joined the fund in March focusing on integrating ESG Into the investment strategy and allowing the fund to approach responsible and active ownership in a more systematic way across its assets.

“We have explored buying into third party governance and engagement initiatives but the board decided that they would prefer to have an in-house resource to develop and pursue our own ESG initiatives,” Taylor says.

“Aled’s first objective was to review the LPFA’s current ESG initiatives and this culminated in [a report] to our investment committee in June which is effectively his focus and work plan.”

The plan is split into three sections – short term, medium term (up to Q4 of this year) and long term (mid-2010).

“You will note that we are concentrating initially on ensuring we are following best practice on voting and disclosure, stock lending and recall, and class action involvement,” Taylor says.

“We are then likely to start reviewing the impact of ESG on our investment strategies.”

In the medium term, the fund will address areas such as benchmarking and measuring success, review all its ESG collaborative initiatives, work to identify potential ESG collaborators and assess its fund managers in the context of responsible investment.

Longer term items include developing policy around voting disclosure and intervention, stock lending and recall to vote and class actions, and reviewing the fund’s ESG strategy.

James Gifford, executive director of the PRI, says while PRI does not monitor specific ESG resources of signatories applied to responsible investment, there has been “significant enhancement of overall capacity year-on-year”.

“We have not heard of any retrenchments of ESG staff among UK asset owners and managers since the downturn began,” he says.

“We can also say that among our signatories, UK asset owners appear to be leading on most principles.”

According to Gifford there has been no slowdown in signatories to the PRI over the last year, with around 12 new signatories every month, which is unchanged from before the crisis.

Before hiring Jones, ESG policy work had been split between the LPFA’s chief investment officer, Vanessa James, and Taylor, but Taylor says the fund lacked resources to pursue more detailed objectives.

As well as being a PRI signatory, the LPFA has joined a number of collaborative initiatives in the area including the Marathon Club, Carbon Disclosure Project (CDP), Institutional Investors Group on Climate Change, Local Authority Pension Fund Forum and the UK Sustainable Investment and Finance Association.

“We are probably the leading local authority fund in this area and work closely with the Mayor of London’s office to support initiatives such as Green London, particularly to mitigate climate change through reducing carbon and ghg (greenhouse gas) emissions,” Taylor says.

The LPFA believes that ESG issues can have a material impact on investment returns over the long term, and that well
diversified institutional investors such as pension funds need to evaluate the extent to which issues such as climate change could affect their portfolios in the years ahead.

“In the context of current events, investors are realising that holding company management to account on a broader range of factors, including ESG issues, is an important means of maintaining long term stability and efficiency in markets so this is a very timely development for us,” the LPFA’s CIO James says.

UK fund progress on responsible investment

*The median self-assessment score achieved by UK pension funds exceeded the median in all other countries in governance, policy and strategy

*UK funds scored highest on Principle 1 (integration), Principle 2 (active ownership), Principle 4 (promote the PRI/RI) and Principle 6 (reporting) *The total number of extensive engagements reported by internal staff of UK signatories far exceeds the number reported in any other country

*All regions, with the exception of Brazil, had a relatively high median score in active ownership with the larger regions (UK and US) scoring higher on Principle 5 (working together) than the other regions who scored higher on
Principle 2 (individual active ownership)

Source: PRI Report on Progress 2009