This report shows public data only. Is this your organisation? If so, login here to view your full report.

Local Pensions Partnership

PRI reporting framework 2020

You are in Direct - Listed Equity Incorporation » Outputs and outcomes

Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

As a result of the decision to exclude thermal coal production, the LPPI Global Equities Fund no longer holds stock within GICS 10102050 Coal & Consumable Fuels

This represents 0.06% of the fund's benchmark.

Specify the percentage reduction (+/- 5%)

.06 %

Select which of these effects followed your ESG integration.

12.2. Additional information.[Optional]

For LPPI's internally managed portfolio, our investment philosophy and approach to implementing this through stock selection decisions routinely integrates ESG.

A thorough analysis of the factors (including ESG) impacting the long term sustainability of the businesses we select is central to our investment approach.  We invest in quality with the intention of holding this long term. We view ourselves as business owners; our strategy is concentrated (at around 30 stocks) and very low in turnover.

Our analysis of material ESG considerations directly informs individual buy/sell decisions but also shapes our investment universe, effectively helping us to condense the population of the MSCI World index (benchmark) into an investable universe of around 200-250 prospects.

The implementation of our investment philosophy and approach are aligned with selecting companies with relatively high ESG ratings (compared with the benchmark) and avoiding sectors with heaviest direct environmental risks. This outcome is visible within the internal portfolio's composition, which contains no exposure to companies in the energy or materials sectors.

 


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG factors that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

Environmental Risk - Climate Change 

LPPI recognises that climate change poses a systemic risk, will have a significant impact on society and on the sustainability of companies globally, and thus on investment returns. 

During 2019 we continued to focus attention on the risks our portfolio potentially faces from climate change and to seek ways to manage this.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

As part of our strategy we have set a target (based on theTransition Pathway Initiative Management Quality score) for extractive fossil fuel companies within our Global Equities Fund to achieve a minimum rating of TPI 3 (Integration into operational decision-making)

The TPI tool helps us to assess whether companies involved in the exploration and production of oil and gas are demonstrably aware of climate change as a risk to their business model and taking effective and meaningful steps to address climate change risks as part of strategic and operational planning.100% of extractive fossil fuel companies within TPI coverage were TPI 3 at 31 December 2019.

LPPI's Global Equities Fund is demonstrably underweight in companies directly engaged in fossil fuel extraction. Energy exposure at 31 December 2019 was 1.35% (benchmark 5.23%).

ESG factor and explanation

Environmental Risk - Product sustainabiility 

Within our internal managed portfolio (Listed equities) we have a significant exposure to Consumer Goods Companies.

For any company that produces consumer branded goods, a key factor to the longevity and growth of these brands is their ability to continue to resonate and be demanded by consumers. Over recent years we have witnessed the increasing importance that consumers place on the everyday products they buy being environmentally friendly / sustainable, especially within younger demographics.

It has become increasingly evident that for brands to maintain relevance with populations who are increasingly aware of their consumption impact on the environment, the companies must take action to demonstrate that their products are helping to reduce such impacts. By fulfilling growing consumer demands, such companies will likely be well placed to preserve and grow brand equity and in turn maintain revenue streams,  reducing the financial risk to client funds as investors

ESG incorporation strategy applied Integration

Impact on investment decision or performance

During 2019 we held discussions with investee companies on how they are incorporating the environmental impact concerns of consumers into their product lines.

Progress:

One company we engaged  (consumer staples) has 

  • made a commitment to make 100% of its packaging recyclable or reusable by 2025;
  • is investing £1.6bn in food grade recycled plastics together with funding start-up ventures to innovate packaging solutions;
  • has now announced it will target net zero GHG emissions by 2050.

Another company engaged  (US:consumer staples) continues to make progress against a commitment to achieve net zero deforestation by 2020 – related to its packaging, and has launched the first ever toothpaste tube which is recyclable.

Given the nature of these initiatives and consumer interest in them, product sustainability will continue to be an ongoing topic of engagement.

Insights gained from research and engagement inform our ongoing evaluation of company fundamentals and intrinsic value which either directly reinforces our investment thesis or identifies issues for further follow-up.

ESG factor and explanation

Social and Governance Risk - Employee Retention

One of the key drivers of the future cash flows a company can generate (and by extension, the returns investors stand to earn as shareholders) is a company’s ability to continue to retain high quality employees that implement the corporate strategy.

This is particularly important in technology companies where there is a competitive market for highly educated and experienced staff.

During the course of our meetings with technology company management teams a key theme of questioning has been their approach (and success) in continuing to attract and retain high quality staff.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

One company in the internal portfolio (US:Information Technology) is a leader in the design and production of analogue chips and sensors. The viability of the company’s future profit generation relies on continuing be a high quality work placefor existing staff and taking effective steps to secure new engineering staff into future decades.

We have asked the company about their strategies for attracting and retaining staff and been impressed with endeavours in this area

  • invests heavily in education engagement – providing research grants to universities as well as supporting STEM education in schools
  • ranked in 100 best companies for working mothers
  • recognised as a minority employer

Insights gained from research and engagement inform our ongoing evaluation of company fundamentals and intrinsic value which either directly reinforces our investment thesis or identifies issues for further follow-up.

ESG factor and explanation

Governance - Board Composition / Performance / Remuneration

In selecting prospective investments for the internal portfolio (and continuing to monitor existing investments) we place strong emphasis on governance considerations.

We focus on the strength of our companies’ boards and the alignment of interests between us (as minority shareholders) and the management team.

Overall Board independence is important but we deem the experience of individual Board members and their track record even more relevant  We aim to buy only high quality companies.  Within high-performance businesses, extending an extraordinary track record in building intrinsic value is the Board's primary function,  most likely to be achieved by retaining qualified and competent directors (who are difficult to come by).

By studying company trajectories and discussing long term strategies with management we assess whether companies are likely to continue experiencing consistent high performance.Our approach to assessing whether management interests are aligned to ours is by analysing the company’s compensation structure. As long term investors, we want management to adopt a long term approach to allocating the company’s excess cash, avoiding behaviour that favours short term gains that usually come at the expense of long term value creation.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Before making any investment we make sure we understand how management incentives are set and we engage with the company, prior to buying the stock, if anything is unclear.

Once an investment is made, we monitor proxy statements to identify whether remuneration policies are subject to change.

2019 Example

During due diligence on a potential addition to the internal portfolio (US:Educational Services) we discussed variable compensation with management to gain a better understanding of cash bonuses, which were based on the achievement of pre-established corporate performance goals and on a qualitative assessment of each individual’s performance. It is difficult for investors to determine if qualitative goals are being achieved and what value they create for shareholders. We expressed our concerns accordingly.

Corporate performance goals based on adjusted EBITDA and adjusted EPS made no reference to capital efficiency. We saw ROCE as an appropriate metric for the company given its acquisitive nature.

The company welcomed our thoughts on compensation and was receptive to considering ways to improve its remuneration structure.

Our decision was to invest, and we have added the company to our Incubator strategy.

13.2. Additional information.[Optional]


Top