Principle 1 Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities

Transcription

1 LOCAL PENSIONS PARTNERSHIP Statement of Compliance with the UK Stewardship Code Introduction Local Pensions Partnership Ltd (LPP) is a pension services provider for public sector pension funds. Our aim is to help clients reduce pension deficits, improve investment returns and lower costs through three core services: Investment management and advisory services; Pensions Administration; Asset and liability risk management. LPP was formed in 2016 as a collaboration between our founding shareholders Lancashire County Council and the London Pensions Fund Authority (LPFA). Today, LPP manages 16bn of pension assets and provides pensions administration services to more than 547,000 members across LGPS, Police and Firefighters pension schemes. LPP s investment management and advisory services are delivered by LPP Investments Ltd (LPPI) which is a company authorised and regulated by the Financial Conduct Authority. LPPI is an Asset Owner signatory to the Principles of Responsible Investment (PRI) which reflects the practicalities of the delegation under which LPPI represents, performs stewardship functions and undertakes ownership responsibilities on behalf of pension funds as investment clients. LPPI s stewardship approach and the procedures which flow from this are fully compliant with best practice principles for asset owners laid out within the UK Stewardship Code. Principle 1 Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities LPPI s approach to stewardship is explained within a Responsible Investment (RI) Policy which is publicly available from the LPP website: 2fFiles%2fFiles%2fLPP+I+RI+Policy+3.0+Aug+18+FINAL+PUBLIC.pdf The RI Policy sets out the beliefs, standards, procedures and activities which underpin LPPI s stewardship of pension fund assets. As a responsible investor by conviction, LPPI seeks to ensure assets are subject to appropriate stewardship arrangements, whether through in-house management, or through the standards required of the third-party managers and other service providers selected to work with LPPI. Stewardship arrangements are a translation of 5 core RI beliefs; 1. LPPI has a fiduciary duty to act in the best long-term interests of client pension funds and their beneficiaries. Fulfilling this duty requires a governance structure, culture and investment approach collectively focussed on adding value over the long term. 2. The objective of Responsible Investment is to secure optimum returns in the long term at an acceptable level of risk. Responsible Investment originates from an 1

2 investment strategy designed to enable client pension funds to meet their obligations to pay pension benefits and is realised in practice through the quality of the business processes which collectively make up stewardship. 3. The primary focus of Responsible Investment is the effective management of investment risks and opportunities in order to achieve optimum risk-adjusted returns on a sustainable basis. The attainment of broader social outcomes is secondary to funding the pension benefits payable to members. 4. Environmental, Social and Governance (ESG) factors can have a direct financial impact on the value of individual investments and an influence on long-term investment performance. The consideration of ESG factors is relevant at every stage in the investment cycle - within investment strategy, investment selection, and within the stewardship of assets in ownership. 5. As providers of capital, investors have influence. Institutional investors should utilise their ownership powers to exert influence in circumstances where their intervention is warranted to protect the long-term financial interests of beneficiaries. Responsible asset owners should maintain oversight of the way in which the enterprises they invest in are managed and how they impact upon customers, clients, employees, stakeholders, and wider society. The benchmarks we routinely measure LPPI s stewardship approach against are the requirements of the UK Stewardship Code and the Principles of Responsible Investment (PRI). We are accountable to our clients for achieving best practice in line with these standards and disclose details of LPPI s stewardship arrangements in compliance with the requirements for signatory transparency associated with them. Our approach to RI is overseen by a Stewardship Committee which meets quarterly and is chaired by LPPI s Chief Investment Officer & Managing Director (Investments). The Stewardship Committee oversee a co-ordinated approach in line with the policies and procedures we have put in place. These are evaluated as part of a process of continual review and will be developed and updated in line with evolving best practice. For example, we recognise the UN Sustainable Development Goals (SDG) as an important frame of reference for understanding and evaluating sustainability and are working towards integrating the SDGs into our stewardship approach. Principle 2 - Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed LPPI is authorised and regulated by the FCA and has a Conflicts of Interest Policy which establishes the parameters of good governance in the management of conflicts. The Policy identifies the types of conflicts (and potential conflicts) which may arise and the approach to managing these. The Policy confirms that LPPI will take all appropriate steps to identify and to prevent or manage potential and actual conflicts of interest to avoid a material risk of damage to the interests of our clients. Arrangements to manage potential conflicts of interest include: Robust governance arrangements which are overseen by the LPPI Board; Management reporting; Maintenance of a Conflicts Register; Segregation of functions and independence; Information barriers; Avoiding inappropriate influence being brought to bear in the way clients are treated; 2

3 Declining to act; Policies in relation to staff activities and other interests for example personal account dealing. All staff have a duty to report any actual or potential conflicts as they occur. An annual Disclosure of Interests Statement must also be completed by all staff. Further details are set out in LPPI s Conflicts of Interest Policy which is available on request. LPPI ensures that delegate managers have robust arrangements in place around their approach to conflict management. Prior to the appointment of any new manager, checks are made around their conflicts process, and there is on-going diligence around the continuing sufficiency of incumbent systems. Principle 3 - Institutional investors should monitor their investee companies Encouraging strong corporate governance by investee companies and identifying situations that are a cause for concern is integral to responsible investment and involves assessing and monitoring companies on an ongoing basis. Assets under management by LPPI are continually being monitored by members of the in-house Investment Team (where investments are internally managed) and by third party managers appointed and overseen by LPPI (where assets are externally managed). Arrangements recognise that Investment Managers maintain a detailed knowledge of the companies within their portfolios and have the most current understanding of the business risks and opportunities they face. By monitoring companies, managers maintain insights on financial performance and underlying business characteristics but also identify material Environmental, Social and Governance matters and how well these are being anticipated and managed as part of broader corporate governance by investee companies. Monitoring insights are inputs to the ongoing evaluation of each company s risk and sustainability profile. Monitoring activity typically incorporates information from a range of sources including company reporting, news media, real time market metrics, and the insight of research and ratings providers. Wider insights from NGOs, trade unions, regulators and other representative groups are also referenced as appropriate. External managers are encouraged to share any material company insights gained from their review activities as part of regular monitoring calls with LPPI. Where LPPI is represented on company boards or limited partner advisory panels the insights gained from company monitoring shape direct feedback to investee companies. Similarly, monitoring of publicly listed companies influences the direction of LPPI s shareholder voting, the selection of priority engagement themes and the targeting of participation in wider investor collaborations. LPPI is committed to using ownership influence to encourage sustainable business practices and corporate decision-making aligned with the long-term best interests of pension fund beneficiaries. However, engagement is both time consuming and resource intensive and achieving the critical mass needed to have impact requires effective partnership and collaboration. LPPI actively seeks opportunities to work with other responsible investors as part of wider initiatives which concentrate collective stewardship resources and seek to achieve greater reach and influence than is possible acting alone. Examples of the organisations LPPI works with on a collaborative basis include the Local Authority Pension Fund Forum (LAPFF) the Pensions and Lifetime Savings Association (PLSA), the Transition Pathway Initiative, the Local Government Pension Scheme Cross Pool Responsible Investment Group, the UK Pension Scheme RI Roundtable, the Workforce Disclosure Initiative and Climate Action

4 Principle 4 - Institutional investors should establish clear guidelines on where and how they will escalate their stewardship activities LPPI recognises that investors have influence as the providers of capital and should utilise their ownership powers in circumstances where intervention is warranted. Active ownership forms part of the responsibilities LPPI fulfils day to day on behalf of investment clients. Whilst each pension fund retains an underlying duty to ensure the effective stewardship of the retirement savings entrusted to them, they gain assurance and place reliance on LPPI s arrangements for executing these duties in practice. The principal route for escalating stewardship is via engagement which utilises the following complementary routes: direct contact instigated by internal and external portfolio managers; shareholder voting (managed centrally by LPPI); broader collaborations working alongside other investors; shareholder litigation. Constructive engagement with company management can help to protect and enhance value by drawing executive attention to material concerns and prompting positive actions in response. In setting guidelines for stewardship activities LPPI is seeking to act as an informed owner on the collective behalf of client pension schemes and their ultimate beneficiaries. Investment Management Agreements between LPPI and third-party managers include a requirement for them to support the Principles of Responsible Investment and to promote corporate governance best practice. Third party managers are expected to monitor investee companies and to escalate any matters of material concern via engagement. Decision-making on the most appropriate route for raising issues with companies is at the discretion of each manager in accordance with their in-house policy. Managers are required to report to LPPI periodically on their engagement activities with investee companies and are also encouraged to share insights as part of broader performance monitoring conversations with LPPI. Shareholder voting is a right and a responsibility of ownership where shares are held in publicly-listed companies. Shareholder meetings provide regular opportunities to review and encourage alignment between company and shareholder interests and to formally register investor concerns where an inadequate response has been received or there is poor progress over time. Shareholder voting for the Global Equities Fund (GEF) managed by LPPI is centrally controlled rather than being delegated to individual investment managers. This approach promotes a consistent approach, allows voting to be responsive to company context and facilitates the tracking of shareholder voting activity and outcomes. As part of maintaining a broader stewardship oversight, LPPI reviews how well accepted standards of corporate governance best practice are being reflected across the portfolio. This may identify issues where a more thematic approach may be appropriate. Thematic engagements can involve making direct contact with individual companies on specific issues but will more often involve participation in broader investor collaborations to build an impetus for improvement in core characteristics such as board diversity and independent oversight, succession-planning, executive remuneration, and shareholder rights across a range of companies. LPPI will seek to work alongside General Partners, Limited Partners, other investors and representative investor groups to gain the collative traction needed to have influence. 4

5 LPPI has arrangements in place for monitoring emerging shareholder litigation and any financial interests in the companies involved. Where appropriate, LPPI will participate in shareholder litigation in order to recover losses and address the financial and other consequences of corporate wrongdoing. Principle 5 - Institutional investors should be willing to act collectively with other investors where appropriate LPPI actively seeks opportunities to work in partnership with other investors and to participate in collective initiatives which address shared stewardship priorities. It is recognised that investor influence is most likely to be fruitful when collective resources are being pooled and a consistent message is being amplified by multiple like-minded investors. LPP and LPPI are networked with a number of organisations which provide the opportunity to align with and give support to collaborative initiatives. These include LAPFF, PLSA, PRI, the Institutional Investor Group on Climate Change (IIGCC), 30% Club, Workforce Disclosure Initiative and CDP. Examples of themes LPPI has engaged on (on behalf of client funds) as part of wider investor collaborations include: Climate change risk, sustainability and the global transition to low carbon; Executive remuneration; Transparency and effective disclosure within corporate reporting; Diversity and independent representation on company boards. LPPI's direct participation has included co-signing investor letters to companies, regulatory bodies and government representatives and expressing support for shareholder resolutions. LPPI collaborates regularly with other LGPS funds, both via direct partnerships such as GLIL 1 and through LAPFF and the LGPS Cross Pool RI Group which brings together stewardship and RI practitioners from all 8 LGPS pools to discuss collective stewardship issues and effective approaches to common challenges. The contact for potential collaborative engagements on behalf of LPP is LPPI s Responsible Investment Manager: frances.deakin@localpensionspartnership.org.uk Principle 6 - Institutional investors should have a clear policy on voting and disclosure of voting activity LPPI has a clear policy on shareholder voting for its GEF which is publicly available from the LPP website: 2fFiles%2fFiles%2fLPPI+Shareholder+Voting+Policy+2.0+Aug+18+FINAL+PUBLIC.pdf Shareholder voting is recognised to present an important route for influencing companies to adopt sustainable business practices and to develop corporate governance arrangements aligned with protecting shareholder value. Shareholder voting for the GEF is managed centrally rather than being delegated to individual portfolio managers. This arrangement facilitates an objective approach which is consistent across the equities held by the fund. LPPI employs an external provider of proxy voting services (ISS) to oversee ballot management and vote execution and to provide voting information, analysis, voting recommendations, and recording and 1 A joint venture between 5 LGPS funds offering a platform for investing in core infrastructure assets, principally in the UK. 5

6 reporting facilities via an online voting platform. Voting recommendations are made in accordance with ISS Sustainability Proxy Voting Guidelines. These guidelines are designed to reflect the requirements of investors who have made commitments to the integration of environmental, social and corporate governance (ESG) issues and to responsible investment practices in line with the Principles of Responsible Investment. The Sustainability Guidelines are reviewed and updated annually to ensure they reflect emerging issues and trends. The detail of forthcoming meetings and ballots is reviewed by LPPI online to identify upcoming issues where it may be appropriate to depart from the provider s voting recommendation. In cases where a different vote is instructed the underpinning rationale is recorded for vote reporting purposes. A report on shareholder voting activity for the GEF is produced quarterly and is published on the LPP website Where LPP participates in securities lending, procedures are in place to assess the appropriateness of recalling lent stock ahead of shareholder meetings. In each case, the direct monetary impact of recalling shares will be considered against the discernible benefits of exercising voting rights. Decisions will reflect the significance of items on the ballot and whether LPP has actively supported reform of the company s governance practices via engagement or other coordinated efforts including shareholder proposals. Principle 7 - Institutional investors should report periodically on their stewardship and voting activities LPP reports periodically on stewardship and voting activities via a range of content made available via our website. Having described LPPI s approach to RI within an RI Policy, we include updated details on our RI and stewardship activities during the year within our Annual Reports. Having described the approach to shareholder voting for LPPI s GEF within a Shareholder Voting Policy, we make details of shareholder voting activity for the GEF routinely available through quarterly voting reports accessible online. Details of our reporting against the Principles of Responsible Investment assessment framework (as part of disclosure by clients Lancashire County Pension Fund and LPFA until 2018) are available as Transparency Reports from the PRI website. In addition to public reporting, LPP reports privately to investment clients in line with their requirements for receiving details of stewardship activities undertaken on their behalf. As part of client reporting we seek to accommodate requests for focus and insights on specific themes where priorities have been identified as being of particular importance. December

7 For Professional Clients in the UK only This document has been prepared to inform the intended recipient of information regarding Local Pensions Partnership Ltd and/or its subsidiary, Local Pensions Partnership Investments Ltd (LPPI) only (together the LPP Group), subject to the following disclaimer. LPPI is authorised and regulated by the Financial Conduct Authority. It does not provide advice on legal, taxation or investment matters and should not be relied upon for any such purpose including (but not limited to) investment decisions. No other person or entity may rely or make decisions based on the content of this document whether they receive it with or without consent and this disclaimer is repeated fully in respect of such third party. This information may contain forward-looking statements with respect to certain plans and current goals and expectations relating to LPP Group s future financial condition, performance results, strategic initiatives and objectives. By their nature, all forwardlooking statements are inherently predictive and speculative and involve known and unknown risk and uncertainty because they relate to future events and circumstances which are beyond LPP Group s control. Any projections or opinions expressed are current as of the date hereof only. You hereby fully acknowledge that this document and its content is provided as is without any representation or warranty (express or implied) and no member of the LPP Group or any of their respective directors, officers and employees shall be held liable howsoever to any person or entity as to the appropriateness, accuracy or completeness of the information provided. 7