Sustainable investment strategies are the name of the game for asset managers with an eye on the GBP500 billion of assets that will be up for grabs from the UKs local government pension schemes (LGPS) by 2030.
Research from XPS Group, a consulting and administration business, reveals that nearly half (49 per cent) of LGPS funds have established Net Zero targets.
Further, almost three-quarters (74 per cent) of LGPS funds have switched their investments into strategies with a sustainable objective, while almost all (94 per cent) are engaging with investee companies to drive action on climate change.
Alex Quant, head of ESG research at XPS, says: “It is encouraging to see half of all LGPS funds have already set a Net Zero target or ambition. But conversely, this means half have not yet determined a Net Zero strategy or ambition. LGPS funds have a responsibility to manage key investment risks associated with climate change, and are ideally positioned to take advantage of the long-term opportunities that will come with the climate transition.”
With deep pockets and defined net zero strategies, LGPS funds are primed to invest directly into climate solutions, and the research reveals that more than a quarter (26 percent) of local authority funds had committed to sustainable projects including renewable energy.
Quant says: “With their scale, long-term horizon and appetite for illiquidity, LGPS funds have a clear opportunity to participate in impactful sustainable investments, such as renewable energy projects or forestry. There has been a growing trend toward impact-focused, or place-based investments – which focus on beneficial impact in a locality – where investors feel they can make demonstrable real-world difference with their investments.”
For example, in October 2023 the GBP5.4 billion Avon Pension Fund alongside Wiltshire, Cornwall, Devon, Gloucestershire and Oxfordshire committed a total of GBP330 million to a local renewable energy fund run by Schroders Greencoat.
The money will be used to invest in technologies such as solar, wind and battery storage across the south west.
The Avon scheme now has GBP500 million committed to renewable infrastructure and energy transition assets; a GBP160 million allocation to local impact assets; and GB2 billion invested in transition aligned and sustainable equity strategies.
XPS finds that engagement is the most likely approach adopted by the LGPS funds on their route to net zero, with almost all (94 per cent) describing it as a key tool to deliver the overall objective.
The GBP30 billion LGPS Central pool, which looks after eight LGPS funds, says its engagement strategy extends beyond fossil fuel companies, and it is supporting 167 engagements with the most carbon intensive companies globally across sectors via the collaborative investor initiative Climate Action 100+.
XPS also finds that 14 per cent of funds have set scheme-level exclusion policies, such as fully divesting from fossil fuels by 2030.
LGPS Central says it has “already significantly reduced its exposure to fossil fuel investments and is closely monitoring the impact of climate risk, among other factors, on all portfolio investments”.
Moving forward, the scheme’s trustees have set “a high bar to additional investment in companies deriving a material proportion of revenues from fossils fuels or being resistant to positive change”.
However, Quant adds a word of caution on negative screening: “Our view is that exclusions should be applied at a minimum level, and only for those companies who have not shown any intention to transition their operations/capital expenditure to align with a low carbon economy, and exclusions are most effective when they follow a period of engagement.”
