LGPS funds finish 2021 with an increased ESG equity focus

Of the 16 investment commitments made during the period by the 28 individual Local Government Pension Scheme funds surveyed, seven were directed towards equities.

Of these seven, all but one — a small emerging market reallocation made by the £28.3bn Strathclyde Pension Fund — were specifically ESG equity allocations. 

The £1.6bn London Borough of Lewisham Pension Fund decided to replace its entire £850mn passive equity exposure managed by BlackRock and UBS Asset Management with three low-carbon equity solutions.

Specifically, the pension scheme has selected the London CIV’s Passive Equity Progressive Paris Aligned Fund and Storebrand Investments’ Global Plus ESG (developed market) and Global Plus ESG (emerging market) funds. 

Meanwhile, the £2.5bn Worcestershire County Council Pension Fund decided to shift 6 per cent of its assets to active sustainable equities from passive equities, and hired Liontrust Asset Management and Baillie Gifford to handle the new exposure.

Any plans to reweight towards equities were also made with sustainability in mind. MandateWire recorded three instances of LGPS funds planning to invest in equities during the quarter, and all were for sustainable equity solutions. 

The £4.9bn Derbyshire County Council Pension Fund raised its long-term strategic allocation to global sustainable equities to 29 per cent of total scheme assets from 3 per cent, and was working to fill that exposure in Q4. 

Though some reallocations have already taken place, the pension scheme still had around 13 per cent of its total assets to allocate to sustainable equities.

Neil Smith, investments manager at Derbyshire County Council Pension Fund, said, however, that it expected investments would be made through existing managers or products provided by the pension’s chosen pool, LGPS Central. 

The £5.3bn Devon County Council Pension Fund said in November that it would use its pool, the Brunel Pension Partnership, for its ESG equity plans.

Mark Gayler, assistant county treasurer, investments and treasury management at the pension fund, said the scheme planned to switch the £455mn it holds in passive UK equities to Brunel’s new UK Passive Climate Transition Benchmark, and its £465mn smart beta passive allocation to Brunel’s World Developed Passive Paris-aligned Benchmark Fund. 

While the benchmarks might change, the manager will not, with Legal & General Investment Management handling both the current allocations and the new Brunel offerings. 

Infrastructure reigns in alts space

Although the Strathclyde Pension Fund was the only scheme to invest in equities without explicit ESG criteria, it did look to bolster ESG elsewhere in its portfolio. 

The scheme committed £50mn to the Temporis Impact Strategy V, an impact fund that aims to invest in renewable energy and in technologies supporting the low-carbon transition, predominantly in the UK. 

This was one of four infrastructure allocations made in the quarter by individual LGPS funds. And, with a total of seven alternative allocations made in Q4, that made it the most popular alternative asset class of the quarter in terms of investment commitments.

Half of the allocations were made by the Worcestershire Pension Scheme. It committed £50mn to a fund managed by First Sentier Investors and £75mn to a fund managed by Stonepeak Infrastructure Partners. 

Property proved more popular in terms of planned allocations, with MandateWire tracking five instances of individual pension funds planning to allocate to the asset class. 

Among them was the £36bn Suffolk Pension Fund, with its meeting minutes revealing that it would be “considering further investments in global property mandates” when it reviewed its strategic asset allocation in 2022. 

Limited investment in fixed income

Investment in the fixed income space by individual LGPS funds was limited in Q4, and what appetite there was tended to focus on the non-conventional debt space. The one commitment made — by the £3bn Wiltshire Pension Fund — targeted bank loans and was funded through a reallocation away from gilts. 

Credit was the focus of the two planned allocations that MandateWire recorded in the quarter. 

One of the two stemmed from the £2.4bn Berkshire Pension Fund, which increased its strategic allocation to credit at the expense of private equity and real estate. 

The other came from the £2.6bn City and County of Swansea Local Government Pension Fund, which disclosed that it was looking at trade finance as a possible alternative to its equity protection strategy.

This article is part of MandateWire’s Europe Deal Flow report