Active equity fund built to ensure alignment between financial returns and positive impacts.
UK public pension pool LGPS Central has built a new £1 billion actively managed equities fund to provide optimum choice within the expressed sustainability-based priorities of its local government pensions schemes.
“We wanted to deliver what our partner funds want,” Mark Davies, the pool’s Investor Director of Active Equities, told ESG Investor.
LGPS Central runs the pooled assets of eight local government pension schemes with a combined £49 billion in assets. Four of the eight – Cheshire, Nottinghamshire, Shropshire and Worcestershire – have collectively invested £1 billion into the new product.
Benchmarked against the FTSE All World Index, the Global Sustainable Equities Active fund will consist of three sub-funds spanning broad, multi-thematic and targeted approaches.
“We decided to split the fund into these three sleeves because we wanted to cover a wide spectrum of potential investments in the sustainability space, to give our partner funds a variety of avenues through which they can implement their future sustainable capital allocation,” Davies said.
The broad-based sub-fund will invest in large companies in transition, such as Ball Corporation, a drinks container manufacturer that is supporting the shift from plastics and glassware to the more easily recyclable aluminium. The thematic fund will target companies offering sustainable solutions across multiple themes, including health. The targeted fund will identify companies “driving significant positive change”, said Davies, noting that Los Angeles-based producer of plant-based meat substitutes Beyond Meat is a key example.
“These sub-funds are trying to play in that sweet spot where the investment case and the impact are aligned, delivering strong investment returns while minimising any potential negative impacts on the environment and wider society,” said Patrick O’Hara, LGPS Central’s Director of Responsible Investment and Engagement.
The fund has been in the works since October 2020, when LGPS Central first met with partner schemes to discuss their sustainable investment priorities. The schemes identified active equities as a priority asset class in which to invest sustainably.
“Nottinghamshire Pension Fund actively looks for investments which can be expected to benefit as a result of the long-term impacts of climate change and other sustainability challenges, and we believe this fund will deliver on this objective,” said Councillor Eric Kerry, Chairman of the Nottinghamshire Pension Fund Committee.
The scheme has invested an initial £320 million into the Global Sustainable Equities Active fund.
“The Global Sustainable Equities Active fund will serve as a foundation we can build on as partner funds’ sustainability-related ambitions evolve,” Davies said.
“Deep dive” selection process
Following a selection assessment, three asset managers were chosen to manage the sub-funds: Mirova (broad), Liontrust Asset Management (thematic) and Baillie Gifford (targeted).
Manager scoring was based on an extensive range of metrics and qualitative information stretching across sustainable investing, financial performance, operational management and firm culture.
O’Hara said LGPS Central did a “deep dive” into each asset manager’s approach to voting on sustainability-related issues, as this can give asset owners “a good indication of their conviction when it comes to ensuring companies are prioritising ESG”.
The selected asset managers demonstrated a strong commitment to sustainability, agreed Davies.
“We will continue to engage with them on a regular basis to discuss the quarterly performance of each sub-fund,” Davies said.
Using the Institutional Investor Group on Climate Change’s Net Zero Investment Framework, LGPS Central has pledged to achieve net zero for both its internally and externally managed portfolios by 2050 or sooner across listed equities, sovereign bonds, corporate bonds, and fixed income. Emissions from its equity and fixed income portfolios will also be halved by 2030, LGPS Central said.