LPFA feels divestment pressure

Investment experts have long known the material risks associated with carbon-intensive securities, but the industry remains divided over what methods are appropriate for dealing with controversial companies.

With Khan requesting that the LPFA comply with his manifesto pledge to divest entirely from fossil fuels, the scheme has found itself under pressure to ditch any remaining carbon-intensive investments it holds.

Climate scientists say the world needs action now; we simply don’t have time for engagement with companies that won't listen

Chelsea Edwards, Divest London

A City Hall spokesperson said: "The Mayor has asked chair of the board, Sir Merrick Cockell, to help him fulfil a manifesto commitment on fossil fuel divestment.

“Sir Merrick will now work to ensure the LPFA implement an approach that recognises the strong environmental and financial case for doing this.‎"

With an exposure to fossil fuels of about 1 per cent, the LPFA is among the greenest pension funds in the UK, and has more than double that exposure to clean or renewable energy.

But figures as of March last year show a £325.26m Dynamic Diversified Growth segregated mandate with BlackRock left the scheme exposed to a few carbon-intensive companies, including Energy Transfer Partners, which is involved in the controversial Dakota Access Pipeline in the USA.

A BlackRock spokesperson said it holds the bonds issued by ETP in order to track an index which is a component of the fund.

The scheme is in the process of divesting from the fund, insisting that the decision was taken for purely financial reasons. At present it still holds some securities associated with the DDG fund, including bonds issued by Energy Transfer Partners.

The LPFA also has a holding in a fund managed by private equity firm Energy & Minerals Group, which was an investment partner of the late fracking pioneer Aubrey McClendon. The LPFA has not announced plans to redeem this investment.

Divestment v stewardship

Divest London said the fund’s large size means even small exposures should be addressed.

“Divest London welcomes any decision from the LPFA to get rid of its exposure to the stranded assets of fossil fuels,” said Chelsea Edwards, campaigner at the group.

She questioned the point of stewardship efforts, which have been undertaken for “decades” by shareholders without significant results.

“Climate scientists say the world needs action now; we simply don’t have time for engagement with companies that won't listen,” she said.

The LPFA disagreed, arguing that divesting would only free up the assets to be bought by investors who do not share its concern over environmental, social and governance issues.

“As providers of capital investors have influence, and as a long-term investor we can work with companies and fund managers,” a spokesperson said, adding that fiduciary duty should always be at the forefront of investors’ minds.

“We can and do utilise our ownership powers to exert influence in circumstances where their intervention is warranted to protect the long-term financial interests of beneficiaries.”

Stewardship tough for small schemes

In the wider universe of UK pension funds, support for responsible investing tends to be patchy, with strong “binary” views on either side, according to Alan Collins, head of trustee advisory services at consultancy Spence & Partners.

Where trustees and sponsors do have strong views on factors such as climate change, the size of scheme often comes into play.

Large funds like the LPFA have the clout and governance budget needed to maintain a long-term stewardship regime, whereas smaller schemes, usually invested in pooled funds, have less sway with managers.

“Many schemes feel it’s too difficult a governance burden to get over,” said Collins. “The primary responsibility is to monitor return on assets relative to the movement in liabilities.”

However he said that the range of ESG-aware pooled funds available to smaller schemes was steadily improving: “There’s clearly a demand for these services.”