Lothian Pension Fund publishes responsible investment principles

The Lothian Pension Fund (LPF) has announced the launch of its new statement of responsible investment principles, stressing that it must act "as an agent for positive change".

With an overall focus on climate change, the scheme has identified six principles, broadly divided into environmental, social and governance (ESG) factors, and the UN Principles for Responsible Investment (PRI).

Its focus on ESG includes incorporating these issues into investment analysis and decision-making processes, as well as seeking appropriate disclosure on ESG issues from any entities in which it invests.

The scheme also stated that it will be an "active owner", by incorporating ESG issues into ownership policies, such as through voting and stock lending activities, and corporate or government engagement.

Commenting on the statement, LPF Pensions Committee chair councillor, Alasdair Rankin, emphasised that the last few years had bought "enormous growth in the acceptance of the importance of informed stewardship and responsible investment" of the scheme's assets.

The LPF reiterated its commitment to PRI, stating that it will promote the acceptance and implementation of the principles within the investment industry.

The scheme pledged to “work together” with like-minded partner funds, service providers and organisations to enhance the effectiveness in implementing PRI, and achieve a best practice in the industry.

LPF will also continue report on its own progress towards implementing the principles through PRI assessment, as well as reporting annually in accordance with the UK Stewardship Code requirements.

The scheme also confirmed that it will continue to complete annual reports in accordance with Taskforce for Climate-related Financial Disclosures (TCFD) recommendations UK, as required by the UN PRI.

The UN PRI now requires signatories to complete TCFD disclosure reports following a two year voluntary period which aimed to help schemes prepare, although a broader consultation on whether this should apply to all occupational schemes is currently underway.

The scheme emphasised that that returns from current and future investments will affect the it's ability to fund future payments, explaining that as a result, it has now committed to ensuring it implements processes that adhere to TCFD recommendations.

This includes the work of the Pensions Committee, which monitors stewardship of the scheme's assets at least annually, as well as work around risk management and carbon analysis.

The focus on meeting TCFD recommendations also forms part of the schemes broader focus on climate change, with its statement stressing the importance of the Paris Agreement of the UN Framework Convention on climate change.

It emphasised that the Paris Agreement had created changes that can represent both significant risks, and opportunities, for pension funds.

LPF European equity manager and lead on the firm's approach to responsible investing, David Hickey, also highlighted climate change as "undoubtedly one of the defining issues of our time", emphasising the fund's specific commitments in this area.

This includes the continuation of work with Climate Action 100+, as well as measuring and report on carbon-equivalent emissions throughout equity portfolios, with an overall goal of having assessed the carbon intensity of all assets by the end of 2022 reporting cycle.

Engagement with firms was noted as a key tactic to drive change throughout the statement, with plans to use data from the Transition Pathway Initiative (TPI) to engage with and encourage other firms to act in line with the Paris Agreement, also outlined.

The LPF has now set a goal that all holdings covered by TPI will have achieved a level 4 assessment, and have a business plan whose carbon performance is in-line with the Paris agreement or better by 2025.

The scheme will also use TPI data to avoid subscribing to new equity or fixed income issuance from firms whose plans are not aligned with the Paris agreement.

It stressed that, as a “provider of responsible capital” it should act as “an agent for positive change”, emphasising the importance of engaging with companies to help them maintain or adopt best business practices.

LPF has previously been called out for its investments with Hapoalim Bank, an Israeli bank that was recently included on a UN list of companies sustaining Israel’s illegal settlements, stating at the time however, that it would work to engage with the bank and look into any deficiencies or oversight issues.

Commenting on the launch of the new statement, LPF chief investment officer, Bruce Miller, added: “While our statutory Statement of Investment Principles incorporates elements of our approach to responsibility, we feel that it’s in the interests of our members to be transparent in the methods we use to foster responsible investment as an organisation.

“We’re very clear that our primary responsibility is to be able to pay the future pensions of our members, but it’s important to all stakeholders that we invest in a manner that the average member sees as fair and reasonable.

"While some of our members will have very strong views on particular companies or sectors, this document articulates how we aim to invest in a responsible manner on behalf of all members whilst not overly emphasising the specific ethical viewpoints of individual members, trustees and portfolio managers.”

The fund is Scotland’s second largest Local Government Pension Scheme (LGPS) fund and holds over £8bn assets under management (AUM).

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