The LGS Board has always had a long-term commitment to RI and ESG which commenced in 1999 when it banned tobacco stocks. LGS has long held the view that management of ESG risks in its investment portfolios is fundamental to fulfilling its fiduciary duties to members - acting in the best interest to generate strong long-term retirement savings.
The LGS RI Policy requires the addressing of ESG risks across the entire investment portfolio with multiple asset classes. As a long-term institutional asset owner, it can be difficult to address these risks, however, as we have built internal staffing resources, LGS has attempted to do so with some innovative product and mandate designs, including the following examples:
- The LGS SRI Overlay - this is a short/long strategy that was introduced on Australian shares in 2004 and international shares in 2011. Since their inception in Australian shares it has contributed +9 basis points pa and international shares +3 basis point pa to the overall performance of the fund. The SRI Overlay ensures that the fund minimises exposure to companies generating any revenue from tobacco, and controversial weapons, more than 10% revenue from armaments, gambling and old growth forests and more than 33% of revenue from coal mining, coal fired electricity generation and oil tar sands as well as companies considered as having a high ESG risk with poor management of these risks. LGS sells any exposure to these companies and then invests in companies with positive ESG attributes. This process has both ensured that we do not have exposure to certain sectors and high ESG risk and controversial companies whilst also contributing positively to the fund's investment performance.
- LGS Sustainable Global Government bonds - In 2012 LGS introduced an innovative approach across our entire allocation to global government bond securities. The process integrates data on the countries' exposure to ESG issues as part of the investment approach. It also allocates up to 20% of the portfolio to green bonds issued by supranational agencies such as the IFC and European Investment bank. These AAA rated bonds offer similar yields to other bonds however the funds raised are devoted to climate change adaptation and mitigation projects in developing countries.
- ESG enhanced passive international equities - In 2012 LGS developed an ESG-integrated enhanced-passive international equities mandate managed by Hermes Funds Management, a group known for their capabilities in ESG and responsible investment. This is one of the first quantitative international equities mandates globally that explicitly integrates ESG signals into the investment process. The manager is also able to attribute investment out-performance to ESG issues.
- Thematic - LGS has exhibited leadership by investing in thematic investments (mainly addressing climate change risks) across a number of asset classes.
- Strategic Asset Allocation - LGS work in integrating climate change risks into our Strategic Asset Allocation process, which to our knowledge, is one of the first examples globally.
- Property - As evident in the section on Property investments, LGS' efforts in reducing our energy consumption on our property portfolio by over 42% since 2009 through use of energy efficient technologies is another example of innovation and leadership.