In-house investments and ESG integration
The Fund’s policy on responsible investment stems from its fiduciary duty to its members and employers, which is clarified by a legal opinion from the Scheme’s Advisory Board on the responsibilities of Scottish Pension Funds.
We believe strongly that environmental, social and governance (ESG) issues affect the financial performance of the companies in which it invests. As a signatory to the Principles for Responsible Investment, the Fund is obliged to incorporate ESG issues into investment analysis and decision-making processes (Principle 1).
Investments are, therefore, assessed with a view to meeting a required level of financial return in the context of achieving an appropriate level of risk diversification, and ESG issues are part of that assessment. ESG factors are an important element of investment risk and opportunity, and there is evidence that the shares of companies with improving ESG ratings are better investments than those that are simply highly rated.(Can ESG Add Alpha”, MSCI ESG Research, Nagy, Kassam & Lee - June 2015) As such, engaging with companies to improve environmental, social and governance practices can lead to better long term outcomes for the Fund.
The Fund’s internal portfolios are actively managed using both fundamental and quantitative investment processes. For the portfolios managed on a fundamental basis, ESG factors are formally assessed as part of the due diligence process before shares are purchased, supported by the research of a specialist third party service (currently MSCI ESG Research), which provides ESG specific data, analysis and research to help identify the risks and opportunities that companies face. This ensures that consideration of ESG factors can be applied to the investment process using data that has been collated in a consistent manner.
We also believe that responsible investment involves exercising its right to vote the shares that it owns, and that it should also involve active engagement with companies. Consequently, it does not follow a policy of exclusion or automatic divestment, as such a policy is likely to transfer ownership rights to investors without responsible investment policies.
To support its voting and engagement activities, the Fund subscribes to a specialist third party service (currently Hermes Equity Ownership Services (EOS)). It is also an active member of the Local Authority Pension Fund Forum (LAPFF), which engages with companies on behalf of the majority of Local Government Pension Schemes across the UK. For those portfolios that are quantitatively derived, ESG issues are addressed through the voting and engagement activities of Hermes EOS and LAPFF.
The Fund’s external managers are also selected and appointed after due consideration of their approach to integrating ESG considerations into their investment processes. Their activities, including scrutiny of how ESG considerations affected investment decisions, are monitored by the Fund quarterly.
The Fund has a long history of taking ESG issues seriously and it will continue to do so. The Fund regularly reports on its voting and engagement activities and these reports can be found in the responsible investment section.