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Local Pensions Partnership

PRI reporting framework 2020

You are in Strategy and Governance » Investment policy

Investment policy

SG 01. RI policy and coverage

New selection options have been added to this indicator. Please review your prefilled responses carefully.

01.1. Indicate if you have an investment policy that covers your responsible investment approach.

01.2. Indicate the components/types and coverage of your policy.

Select all that apply

Policy components/types

Coverage by AUM

01.3. Indicate if the investment policy covers any of the following

01.4. Describe your organisation’s investment principles and overall investment strategy, interpretation of fiduciary (or equivalent) duties,and how they consider ESG factors and real economy impact.

LPPI is a provider of investment management services to public sector pension funds within the UK.

We strive to be a responsible long-term investor via an investment approach which is driven by the circumstances of our clients and their specific investment needs. Our clients are long-term investors with a duty to safeguard the cumulative pension savings of their members through the investment arrangements they put in place. Ensuring sufficient funds are available to pay retirement benefits as they fall due is a liability which stretches decades into the future and which ultimately requires a cost effective and sustainable investment approach.

Our Responsible Investment Policy sets out our investment beliefs as these relate to a commitment to integrating material ESG considerations within investment decision-making (as part of evaluating risks and opportunties) and actively utilising ownership rights to engage with investee companies where this is warranted to protect investment value and encourage corporate sustainability.

Our first investment belief encapsulates this as follows:

LPPI has a fiduciary duty to act in the best long-term-term interests of client pension funds and their beneficiaries. Fulfilling this duty requires a governance structure, culture and investment approach collectively focussed on adding value over the long term.

 

 

01.5. Provide a brief description of the key elements, any variations or exceptions to your investment policy that covers your responsible investment approach. [Optional]

Our Responsible Investment beliefs are set out within LPPI's Responsible Investment Policy as follows:

We believe that;

1. LPPI has a fiduciary duty to act in the best long-term-term interests of client pension funds and their beneficiaries. Fulfilling this duty requires a governance structure, culture and investment approach collectively focussed on adding value over the long term.

2. The objective of Responsible Investment is to secure optimum returns in the long term at an acceptable level of risk. Responsible Investment originates from an investment strategy designed to enable client pension funds to meet their obligations to pay pension benefits and is realised in practice through the quality of the business processes which collectively make up stewardship.

3. The primary focus of Responsible Investment is the effective management of investment risks and opportunities in order to achieve optimum risk-adjusted returns on a sustainable basis. The attainment of broader social outcomes is secondary to funding the pension benefits payable to members.

4. Environmental, Social and Governance (ESG) factors can have a direct financial impact on the value of individual investments and an influence on long-term investment performance. The consideration of ESG factors is relevant at every stage in the investment cycle - within investment strategy, investment selection, and within the stewardship of assets in ownership.

5. As providers of capital, investors have influence. Institutional investors should utilise their ownership powers to exert influence in circumstances where their intervention is warranted to protect the long-term financial interests of beneficiaries. Responsible asset owners should maintain oversight of the way in which the enterprises they invest in are managed and how they impact upon customers, clients, employees, stakeholders, and wider society.

Our Responsible Investment approach focuses on fulfilling the responsibilities connected with managing investments on behalf of pension fund clients as a trusted long-term steward of the retirement savings invested within asset-backed pension funds.

01.6. Additional information [Optional].

          
        

SG 01 CC. Climate risk

01.6 CC. Indicate whether your organisation has identified transition and physical climate-related risks and opportunities and factored this into the investment strategies and products, within the organisation’s investment time horizon.

Describe the identified transition and physical climate-related risks and opportunities and how they have been factored into the investment strategies/products.

LPPI is committed to the integration of material ESG considerations within investment decision-making. We have identified climate change as a material, systemic and idiosyncratic risk and have begun to identify and consider transition and physical risks as part of our investment procedures. 

Internal definitions of transition and physical climate risks based on Bank of England, TCFD and other industry reports have been produced and presented to our Investment Committee. We recognise transition risk will primarily impact transport, buildings and industries with high carbon emissions, and will also arise where alternative technologies exist and where there are existing regulatory mechanisms. Physical risks arise from where assets are located and on the stability of the markets they serve. They feature flooding and the consequences of extremes of temperature and are lower (in the short term) than within medium and long term scenarios,

Our overall approach is to integrate climate change consciousness into all our investment products, reflecting that climate change will affect all markets, sectors and asset classes and cannot be avoided through tilting, exclusion or sectoral divestment, though there are some obvious areas facing a more significant impact. The identification of sectors most likely to be negatively impacted by climate change led us to focus first on the traditional energy sector and specifically our portfolio's exposure to extractive fossil fuels.

For our Global Listed Equities Fund we have placed restrictions on investments in thermal coal and imposed qualitative conditions on investments in extractive fossil fuel companies, requiring managers to be able to evidence companies are demonstrably planning for the global transition to a low carbon economy and have a strong strategy in place to manage the physical, regulatory and transition risks faced from climate change.  We are significantly underweight in Energy versus the benchmark.

We have introduced an approach to extractive fossil fuel companies within our private market asset classes which excludes new investments in thermal coal, favours a progressive reduction in existing exposure and requires managers to  provide reporting on remaining exposure to fossil fuel extraction. 

For direct investments in real assets (real estate and infrastructure) our approach to climate change risk management focuses on detailed context specific due diligence which incorporates physical, transition and regulatory dimensions as part of the consideration of location, market, sector, product and company fundamentals.

Within Real Estate our Investment Adviser is including green lease clauses within new leases to increase the number of properties reported upon and is also developing a long term work-plan to bring the portfolio up to the energy efficiency standards expected to be mandatory by 2030.

 

01.7 CC. Indicate whether the organisation has assessed the likelihood and impact of these climate risks?

Describe why your organisation has not yet assessed the likelihood and impact of climate risks

We are in progress with but have not yet concluded a full quantitative assessment of likelihood and impact.

Our objective is to move forward from a qualitative understanding of climate change risks which has focussed on understanding scope and identifying hazards (how, when and where climate change may have an impact and create risks and opportunities) to a more quantitative understanding of the portfolio's exposure to these hazards.

Nevertheless, where investing directly we do seek to consider a variety of risks through scenario analysis and this where relevant will include assessment of both the probability and impact of different scenarios including those driven by climate change.  An example being when underwriting a possible investment in the airport sector.  In this case our internal team engaged with a series of external advisors to assess the likely impact of changes to behaviour and fiscal policies on the performance of the airport.  This included an assessment of both impact and likelihood of these risks and enabled our Investment Committee to better judge the opportunities and risks of the proposed investment.

01.8 CC. Indicate whether the organisation publicly supports the TCFD?

01.9 CC. Indicate whether there is an organisation-wide strategy in place to identify and manage material climate-related risks and opportunities.

Describe

LPPI has taken steps to identify and (where appropriate) seek to adapt its portfolio to mitigate climate risk.

Our organisation-wide strategy originates from LPPI's Responsible Investment Policy - Annex on Climate Change. Here we state our Climate Change beliefs, and make a statement of intent regarding implementation based on quantification and integration into key investment processes such as investment selection, portfolio monitoring and voting and engagement.

A recent step in our ongoing process is agreement to convene a Climate Risk Panel which will initially consist of representatives from our Risk, Investment Strategy and Responsible Investment teams. The Panel will jointly discuss and seek to meet the interdisciplinary challenges associated with systematically identifying and quantifying climate related opportunities and risks in order to be able to plan for building these into strategy policy and practice.

1.10 CC. Indicate the documents and/or communications the organisation uses to publish TCFD disclosures.


SG 02. Publicly available RI policy or guidance documents

 

02.1. Indicate which of your investment policy documents (if any) are publicly available. Provide a URL and an attachment of the document.

02.2. Indicate if any of your investment policy components are publicly available. Provide URL and an attachment of the document.

02.3. Additional information [Optional].

LPPI's Responsible Investment Policy (and its Annexes on Climate Change and Controverisal Weapons) are publicly available from the investment management page of the LPP's website at the following link:

https://www.localpensionspartnership.org.uk/What-we-do/Investment-management/Responsible-investment/Responsible-investing-policies

LPP's Statement of Compliance with the UK Stewardship Code (2012) contains additional information on LPPI's stewardship of assets (including voting and engagement) and is available from the LPP website at the following link: https://www.localpensionspartnership.org.uk/Portals/0/Documents/LPP%20Stewardship%20Code%20Statement.pdf?ver=2020-01-02-122003-017

 

 

 

 

 

 


SG 03. Conflicts of interest

03.1. Indicate if your organisation has a policy on managing potential conflicts of interest in the investment process.

03.2. Describe your policy on managing potential conflicts of interest in the investment process.

LPP Investments Ltd is authorised and regulated by the Financial Conduct Authority and has a Conflicts of Interest Policy which establishes the parameters of good governance in the management of conflicts.

The Policy identifies the types of conflicts (and potential conflicts) which may arise and the approach to managing these. The Policy confirms that LPPI will take all appropriate steps to identify and to prevent or manage potential and actual conflicts of interest to avoid a material risk of damage to the interests of our clients.

Arrangements to manage potential conflicts of interest include:

  • Robust governance arrangements which are overseen by the LPPI Board;
  • Management reporting;
  • Maintenance of a Conflicts Register;
  • Segregation of functions and independence;
  •  Information barriers;
  • Avoiding inappropriate influence being brought to bear in the way clients are treated;
  • Declining to act;
  • Policies in relation to staff activities and other interests for example personal account dealing.

All staff have a duty to report any actual or potential conflicts as they occur. An annual Disclosure of Interests Statement must also be completed by all staff. Further details are set out in LPPI’s Conflicts of Interest Policy which is available on request. 

03.3. Additional information. [Optional]


SG 04. Identifying incidents occurring within portfolios

04.1. Indicate if your organisation has a process for identifying and managing incidents that occur within investee entities.

04.2. Describe your process on managing incidents

All assets under internal management by LPPI are monitored by the investment team via a continuous review process.

If material incidents arise, staff will gather qualitative and quantitative information as a basis for evaluating what actions may be required. This could involve making contact with a company to gain further information on the facts of the case and how matters are being managed. It could also involve seeking insights from other informed/expert parties able to assist with a relative evaluation of the severity of the issue and offer opinion on the appropriateness of the company's procedures and response. The management approach taken will be dependent on the seriousness of the event, the asset in question, the capacity in which it is being held on behalf of client funds, and the closeness of LPPI's relationship with the company.

LPPI's knowledge of material incidents at investee companies informs a continuing evaluation of corporate fundamentals and sustainability and influences LPPI's direct interactions and broader engagement planning whether as an owner, shareholder or limited partner.

Assets under external management are monitored by managers appointed by LPPI who follow their own internal procedures for identifying and managing incidents. 


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