Environment, social and governance (esg) is an opportunity for the new lgps pools

Almost every investment and governance conversation I’ve had in the past six months has, to a greater or lesser extent, mentioned ESG.  And almost every investment house, bar the hard-core profit-maximisers, have included ESG in their marketing in some form or another.  

 

One driver is the pressure groups arguing for divestment.  Increasingly, they are moving away from demonstration tactics towards using financial arguments, such as the potential downside from being invested in stranded assets and the unsustainability of poor working practices.  They may still only be presenting one side of the argument but their voice is now heard at the table.  For example, a recent LGPS Strategy Day I attended focused on ESG and invited the local climate activists to attend to state their case.

 

A second is the growth of funds focusing on sustainability.  Their argument is that it is better to focus on what works in the long term rather than explicitly excluding ‘sin’ stocks.  By virtue of their process, they argue, the latter will be excluded anyway.

 

A third is the public scrutiny around certain ESG issues such as executive remuneration and, increasingly, the realisation that shareholders can have significant influence through engagement.   The LGPS can take some pride that, via LAPFF, it has been at the forefront of engagement with some notable successes. 

 

The debate between these three different approaches - whether to engage, divest or simply look elsewhere - is at the centre of today’s ESG policies.  There is, of course, unlikely to be a perfect answer and different companies will need different approaches.  Persuading a tobacco company to disengage from tobacco is always going to be a hard sell and yet mechanical divestment rules can easily lead to artificial (and potentially costly) investment decisions.

 

Given the LGPS’s longstanding focus on ESG, this is something which all the pools currently being set up will have to embrace.  Some are already setting up sustainable or ethical funds.  If done well, it could be a major selling point to those participating Funds who are perhaps less convinced by the financial arguments for pooling.    

 

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