Scotland’s Lothian Pension Fund has adopted a new policy document in a bid to be more transparent about how it pursues responsible investment, an approach that now includes a commitment to no longer supply new debt or equity capital to companies not deemed to be aligned with the goals of the 2015 Paris climate change agreement.
Publication of the document – ‘Statement of Responsible Investment Principles’ – comes against a backdrop of what Councillor Alasdair Rankin said was “enormous growth in the acceptance of the importance of informed stewardship and responsible investment of assets at Lothian Pension Fund”.
Rankin is chair of the pensions committee at City of Edinburgh Council, the administering authority for Lothian Pension Fund, second largest in Scotland’s local government pension scheme (LGPS).
The new document goes beyond the pension fund’s statutory statement of investment principles, which only includes high-level information about its approach to responsible investment.
CIO Bruce Miller said: “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.”
In the responsible investment policy statement, the pension fund said it “should not be considered as either an ‘ethical’ or ‘unethical’ investor, but as a responsible steward of capital”.
“The mantra we’ll follow from now on is very clearly ‘Engage our equities, deny our debt’”
David Hickey, European equity manager at Lothian Pension Fund
European equity manager David Hickey has been leading on the pension fund’s overall approach to responsible investment, and played a key role in the adoption of the statement of responsible investment principles.
He said the pension fund was making some specific climate change-related commitments.
In addition to ceasing any primary investment in non-Paris-aligned companies, the pension fund would be measuring the carbon intensity of 100% of its assets by the end-2022 reporting cycle.
The responsible investment policy document states it will use estimates if necessary to do this, and will seek support from external managers and GPs.
2025 crunch time
According to Hickey, the pension fund will also be continuing engaging with non-Paris-aligned companies until 2025, “with any companies making little progress towards the goals likely being divested at this point”.
In its policy document, Lothian states that “academic research supports the belief that successful engagement adds value to the investment process, and that divestment has no effect on company finances in the long term and can produce perverse incentives in the short term”.
However, “where material risks remain following engagement activity, we retain the ability to divest”.
Hickey said: “The mantra we’ll follow from now on is very clearly ‘Engage our equities, deny our debt’.
“Lothian Pension Fund will no longer supply new funding to non-Paris aligned companies either through new bond issuance or through new equity issuance.”
Fixed income analyst Miko Zhou added: “Traditionally carbon footprints measures have only been applied to equity holdings, but the reality is that new capital fundraising happens in the debt markets far more than the equity markets. It’s this bond issuance that’s often used to finance new capital projects.”
The pension fund will be using data from the Transition Pathway Initiative (TPI) to come to a decision about companies’ alignment with the Paris accord.
CEO Doug Heron said he hoped the new statement of responsible investment principles “could be the start of a an open conversation around collaboration that will lead to other funds implementing similar statements and we’re happy for this document to become a basis for wider adoption of such standards throughout the LGPS space”.