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'What sort of responsible investor are you?'

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Responsible investment is the topic on all agendas in the Local Government Pension Scheme (LGPS). And activity around it has certainly increased.

As investment advisers, we see it in our clients’ questions and the greater focus on environmental, social and governance (ESG) issues in tenders. Anecdotally, investment managers also report a similar increase in the volume of enquiries on responsible investment.

This increase in activity begs a question: why? Is it a result of changing regulation, the increased external scrutiny being placed on funds by third parties, or just the latest fad? Maybe it is a growing realisation that considering responsible investment issues is simply best practice. Can it be that investors are changing their behaviours?

The recent change in regulations for occupational pension schemes sought to encourage a change in behaviours, something we also expect in the forthcoming guidance for LGPS funds. While some will inevitably continue to follow a tick box approach to responsible investment issues, we believe that funds should start from a different premise and ask themselves what sort of responsible investor they want to be.

There is a spectrum of positions that investors can take, ranging from a pure compliance approach to being a leader. In our own discussions with clients, we have employed a framework that allows investors to consider the behaviours they wish to show rather than the actions that they need to take. We characterise three distinct positions within this framework – core, active and leader.

Core investors act to understand the implications of responsible investment on decision making, though typically delegate responsibility for implementing policies to investment managers. These investors may adopt a proactive approach to monitoring and engaging with managers.

Active investors clearly understand and engage with responsible investment in developing and implementing strategy, and actively seek approaches consistent with their beliefs. These investors will actively engage with managers and seek more information in reporting.

Leading investors fully integrate responsible investment into developing and implementing strategy. These investors place more focus on long-term thinking and the use of collaborative powers to promote best practices.

Investors can clearly take different positions within this broad spectrum. Those working in the core space may show some behaviours that could be regarded as leading. But to generalise the positions that investors may choose to take, and the behaviours they may exhibit, provides a more challenging – perhaps provocative – approach to the discussion. By characterising these positions we can test investors’ conviction and commitment to responsible investment.

There are several factors that will influence where investors choose to sit, although three are perhaps critical.

First is the set of investment beliefs that committees have in place – if indeed they do. Strong beliefs on responsible investment should encourage funds to show the appropriate behaviours.

Second is the overall governance budget available to the fund. LGPS pooling should be helpful in this regard by allowing funds to benefit from more collaboration and collective policies, and through sharing knowledge and experience.

Last is the extent of external scrutiny of the investment arrangements. Funds continue to be challenged by third parties but may also compare themselves with their peers. As more funds embrace responsible investment, so the bar is pushed higher and the behaviours that characterise even the core position advance. So all investors get better.

Responsible investment is not going away. It is not the latest fad but a recognition within the industry that investors do not need to behave like investors. They need to behave as asset owners.

Simon Jones, head of responsible investment, Hymans Robertson

Column sponsored and supplied by Hymans Robertson

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