The expansion of the RI Team has enabled a more regular and detailed dialogue on RI/ESG matters with asset class teams.

Additional resources are improving the support investment colleagues are receiving. A more regular dialogue is helping to build productive relationships and to identify ways in which the RI Team can assist the development of tools and frameworks which enable investment staff to grow their own understanding and encourage the knowledge and insights required to ensure investment processes routinely target issues material to the specific context of the investment decisions under consideration.

During 2019 the RI Team has worked alongside asset class teams to encourage delegate managers to provide more information on their approach to ESG integration and examples of how this influences asset selection decisions or triggers interventions and engagement.

For example, detailed interaction with managers has occured as part of the due diligence associated with transitioning existing funds (originally selected by client pension funds) into asset pools overseen by LPPI. Where incumbent managers have not previously been subject to detailed due diligence on their RI capabiliites, appropriate hurdles apply.

Incumbent managers have generally been receptive to initial conversations about ESG reporting and LPPI's need for insight into their stewardship approach but more variable in response to detailed questions about the information they can routinely provide (dependant on their size, country, and degree of existing commitment to ESG).

One incumbent US GP investing in multiple fund of funds is now identifying the proportion of investee funds with RI policies in place, the sectoral breakdown of underlying holdings and commentary on efforts to reduce thermal coal exposure. Collectively this improved insight into portfolio risk composition and wider stewardship oversight is a strong example for other comparable managers of what is possible . 

The addition of a Climate Change Analyst to the RI Team during 2019 has increased the specialist insight available to the investment business (which incorporates Risk, Strategy, Operations and asset class specialisms).

The establishment of a role dedicated to climate change is an investment in the added resource and stronger focus needed to develop a shared knowledge and understanding of the risks and opportunities faced and build appropriate governance, strategies and processes to manage them. 

First steps include evolving frameworks for

• conceptualising and identifying risks and opportunities; 
• identifying viable approaches to mapping quantification and monitoring (via tools and metrics).

Both are underway as part of seeking a more systematic, robust and quantifiable approach to managing, monitoring and reporting on climate change risk.

Resourcing sufficiency (staffing and systems) remained a strong focus in 2019. This reflects the dynamic nature of investment stewardship and the rapidly changing regulatory framework.

Staffing

During 2019 LPPI has built out an RI Team.

Three Analysts were recruited to work with the Head of RI in supporting the Investment business and client pension funds in their fiduciary, asset management, stewardship and ownership responsibilities.

Increased staffing resources allow for greater coverage and concentration on priority areas including climate change, data and metrics (monitoring and reporting) and active ownership (shareholder voting and engagement).

Providers

The procurement of an external provider of engagement services concluded succesfully in late 2019. Services reflect a comprehensive specification and will commence in Q1 2020. The provider will partner with and supplement ongoing work by LPPI's existing in-house team.

Systems

Better data on underlying investments within private market asset classes are a priority focus for the RI Team's Data Analyst.

Work to improve portfolio ESG insights has focussed on gaining better look through to underlying investments which has involved system reconciliations and data cleansing in preparation for supporting improved analysis of sector-based exposures. 

ESG metrics from a 3rd party provider are being used to produce a portfolio ESG score for the Global Equities Fund (GEF) on a quarterly basis. Scores are used to monitor the listed equity portfolio's absolute ESG score versus the benchmark and to review its trend over time. 

The Stewardship Committee is receiving quarterly information on the headline ESG score for the entire GEF. In addition, ESG scores are also produced for each manager mandate within the portfolio. 

ESG metrics are a tool. They offer a distilled summary which is useful for comparative purposes, but which is inevitably subjective.

Whilst portfolio ESG scores are principally being used to compare mandates on an ESG basis and develop insights and questions for managers about the ESG components of their stock selection decisions,  metrics may in future (as data points build up over time) also become more capable of assisting analysis which seeks to relate portfolio ESG characteristics to investment outcomes. 

In 2018 LPPI implemented a restriction on thermal coal exposure by excluding companies earning more than 50% revenue from thermal coal production from our Global Equities Fund. 

During 2019 we have shifted the focus to reducing thermal coal exposure within our private market asset classes. This is a more difficult and complicated landscape given the range of investment vehicles in place.

We do not have a high level of exposure to thermal coal production. Our agreed approach is to acheive a continual reduction in this exposure over time by placing a restriction on the addition of new thermal coal exposure (companies earning more than 50% of their revenue from thermal coal production).  Meanwhile we require managers with existing exposure to thermal coal to provide reporting on this for our monitoring purposes (they understand we expect to see a discernible decline in remaining exposure over time as investments reach maturity). 

LPPI engaged a provider of GHG metrics in 2018 to improve measurement capabilities and assist LPPI's understanding of the emissions intensity of the Global Equities Fund (GEF).

Initial portfolio analysis (conducted in Dec 2018) suggested a positive alignment between LPPI's GEF and the emissions reduction pathway needed to achieve the Paris Agreement target of 2 degrees. Analysis based on holdings at 31st December 2018 indicated emissions were significantly below the pathway for 1.75 degrees (according to the provider's measurement methodology).

An equivalent analysis undertaken by the same provider in December 2019 indicates portfolio emissions intensity for the GEF has reduced marginally over 12 months (-4%) and the GEF has an emissions intensity positively aligned with the pathway for 1.5 degrees of warming (when our point in time emissions intensity is plotted against the pathway for 1.5 degrees of warming based on the IPCC's Low Energy Demand scenario).

Methods for evaluating the position of investment portfolios relative to temperature trajectories required to achieve Paris Agreement targets are in early infancy and subject to multiple methodological and practical challenges and criticisms. We continue to seek robust, credible and understandable ways to understand and measure risk and performance on an actionable basis.

LPPI's current priority focus within RI is climate change.

Examples of progress during 2019 :

LPPI has been a named supporter of the Transition Pathway Initiative (TPI) since its inception. In 2019 we took the further step of becoming a strategic asset owner partner. We now provide financial support to the initiative and are represented on the TPI Steering Committee.

LPPI is a participant in the Institutional Investor Group on Climate Change Investor Practices Programme - we are a member of the Real Estate Working Group of the Paris Aligned Investment Initiative.

Our Head of RI has participated in several workshops, roundtables and conferences during 2019 representing and speaking on behalf of LPPI.

Examples

Panelist

• LAPF Strategic Investment Forum (July 2019)
• LGPS Central RI Event (July 2019)

Roundtable (with published whitepaper)

• Portfolio Institutional - Roundtable on Responsible Investment (Nov 2019) 
• Camradata - Responsible Investing - the new normal (Nov 2019)