Draft ESG guidance prepared for UK’s £217bn local authority pension pooling plan

Meeting takes place today, hosted by PIRC

Draft guidance on responsible investment is set to be discussed at a meeting today by the body overseeing the pooling of £217bn (€250.8bn) in assets of the UK’s 89 local government pension funds.

The guidance has been prepared by Brian Bailey, chairman of corporate governance research firm PIRC, and Dawn Turner, head of pension fund management at the £2.5bn Environment Agency Pension Fund.

The guidance, seen by Responsible Investor, sets out the features of an ESG policy that local government pension schemes must develop under regulation introduced by the UK government last year.

It comes as the UK’s 89 local government pension funds are in the process of pooling under the same regulation – the LGPS (Management and Investment of Funds) Regulation 2016. The 89 funds will remain intact and take decisions on behalf of members on asset allocation, but the money will be put in eight pools that will hire investment managers to run those assets, or run some of the money in-house.

Sitting above the pools is the Scheme Advisory Board, which is made up 50% of employer representatives and 50% trades union representatives appointed by the Department for Communities and Local Government. The Board chair is Cllr Roger Phillips, former chair of the Local Government Pension Committee.

The board’s investment, governance and engagement sub committee, chaired by Cllr Kieran Quinn, Chair of the Greater Manchester Pension Fund, will consider the new guidance and then send it on, with comments, to the UK Pensions Secretary for consideration.

The meeting will be held at PIRC’s offices.

The responsible investment guidance says a policy should make clear how ESG issues are considered in the selection of investments, and that a comprehensive policy should cover a broad range of asset classes.

It also illustrates different levels of approaches local government pension schemes could take on ESG matters from meeting core regulatory objectives to broad active engagement.On pooling, the guidance says LGPS funds will need to be clear their requirements on ESG are understood and facilitated by the pool operator and any asset manager appointed by the pool. It also says pools should use their “scale” to ensure LGPS funds wishes are fully implemented, or consider excluding asset managers who cannot meet defined needs.

The Scheme Advisory Board has also taken a firm line on the controversial issue of asset management costs and charges. It will launch a voluntary Code of Transparency for LGPS asset managers to help pension funds achieve transparency of investment costs. It will require managers to fill out a publicly available fees template.

The responsible investment guidance also says LGPS working together on ESG matters will be more effective and sets out the adoption of the UK Stewardship Code, required under the LGPS (Management and Investment of Funds) Regulation 2016.

However, the responsible investment guidance does not address a matter of continuing controversy – statutory rules around divestment introduced by government last year.

The UK government has come under fire for saying that it is inappropriate for LGPS pension policies to pursue boycotts, divestment or sanctions against foreign nations and UK defence industries, unless restrictions have been put in place by government.

Pro-Palestine campaigners have reportedly been granted permission to take the government to the High Court over the guidance saying “it prevents councils from boycotting companies involved in Israel’s human rights violations in the West Bank”.

The move to pool LGPS schemes was kick-started by former Chancellor George Osborne, who in 2015 asked schemes to come forward with proposals for pooling their assets. The government has set a deadline of April 2018 for the pools to be established.