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SRI at the ‘heart’ of new £2.5bn equities mandate, says UK pension pool

Hunt for asset manager is the latest sign of growth in ESG integration for UK pensions

A second ‘pension pool’ in the UK has announced it is putting responsible investment at the “heart” of its investment process, in a further sign that the topic is becoming a priority for the £217bn sector.
The £40bn (€44bn) LGPS Central, which includes the public pension funds of Derbyshire, Leicestershire, Nottinghamshire, Shropshire, Staffordshire, the West Midlands, Worcestershire and the West Midlands Integrated Transport Authority, is looking for an asset manager to run a new £2.5bn active global equities mandate.
The pension partnership is one of eight being established under new government rules to ‘pool’ the assets of local authority funds. They have until April to become operational.
LGPS Central said it will shortlist 10-15 asset managers to run the fund, which will be whittled down to no more than five. Although, it is not a dedicated SRI vehicle, managers must still demonstrate that “responsible investment [is] at the heart” of their investment process, LGPS Central said. It expects to launch the vehicle in the third quarter of this year.
LGPS Central’s incoming Director of Responsible Investment and Engagement, Michael Marshall, told RI that it “will only appoint managers with a clear and compelling process for integrating responsible investment factors into the investment process”. Marshall was previously Responsible Investment Officer at the UK’s West Midlands Pension Fund.
He added that applicants will be asked responsible investment-related questions at every stage of the process, and that their responses “will be a factor in our decision to progress a manager through the process, alongside the remainder of the manager’s submission”.
The call for tenders, which closed yesterday, makes it clear that the inclusion of ESG considerations should not inflate the price, specifying that applicants must demonstrate “low, fully-transparent costs”.LGPS Central expects prospective managers to complete a “cost transparency template”, which builds on the Local Government Pension Schemes (LGPS) Advisory Board’s Code of Transparency – the voluntary code for local authority asset managers. Signatories to the code commit to the “transparent reporting of LGPS investment costs and fees to administering authorities”.
Asset managers that have signed up to the code include BlackRock, Deutsche Asset Management, Fidelity, Legal & General, State Street, UBS Asset Management, Newton Investment Management and Axa Investment Management.
LGPS Central, which is chaired by Joanne Segars, the former head of the UK’s Pensions and Lifetime Savings Association (PLSA), is looking for a performance target of +1.5% per annum and will use the FTSE All World Index Total Return as its benchmark.
RI was told that no consultants will be used in the process.
LGPS Central is the second of the eight UK pension pools to prioritise responsible investment in its search for new managers. It follows a ‘reverse roadshow’ conducted by the £28bn (€31.7bn) Brunel Pension Partnership – another Code of Transparency signatory –who outlined in a presentation to potential fund managers its preference for ESG integration. It has already awarded a $38bn custody mandate to US investment giant State Street, which includes ESG provisions.
There is a growing push in the UK to prioritise sustainability in pension fund strategies. As well as expected changes to fiduciary duties rules in the country this year, UK Pensions Minister Guy Opperman challenged trustees to be able to account for how investee companies are managing climate risk and addressing corporate governance, as well as broader ESG issues. He will launch a consultation on the topic.