UK offers LGPS pools a dual stewardship approach but restricts divestment
The UK’s local government pension funds, which collectively manage more than £400bn in assets, could be given greater flexibility on responsible investment as the government attempts to reconcile politically divided funds into eight mandated pools
New guidance released by the UK government offers LGPS funds more latitude on responsible investment but simultaneously reinforces restrictions on country- and company-level divestments. The changes, outlined in the updated Guidance on Maintaining an Investment Strategy Statement, recognise that partner funds within an LGPS Pool may not always agree on a common responsible investment policy at pool level.
Earlier drafts of the guidance, seen by Net Zero Investor, appeared to imply that a single pool-wide responsible investment policy was required. The final version instead states: “Where the responsible investment strategies of all partner funds cannot be aligned, pools and administering authorities should work together to form a limited number of groups of partner funds which each have an aligned approach.”
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At the same time, the guidance maintains the government’s restrictive stance on divestment, warning that “authorities should exercise caution against undue influence from campaign groups.” This comes as pension funds face growing pressure from climate campaigners to divest from fossil fuels. The guidance explicitly states: “The responsible investment approach should not set exclusions for investments in individual countries, investment styles or companies.”
This poses fresh challenges for funds that have already committed to divesting from fossil fuels, such as Wiltshire, Waltham Forest and the Environment Agency Pension Fund.
However, while earlier drafts suggested that pools could reject a fund’s responsible investment policy if deemed “not reasonably practical” to implement, the new rules place a greater onus on the pool to find a suitable investment strategy for all its partners.
Pooling impact
These changes arise because the UK’s 86 LGPS funds are now legally required to transition their assets under the management of one of eight LGPS Pools. While funds are still expected to set out their approach to responsible investment within their Investment Strategy Statements, pools are now tasked with implementation.
While funds are theoretically politically neutral, significant differences have emerged in practice. Liberal and left-leaning councils have adopted policies to phase out fossil fuels, whereas some Reform UK- or Conservative-led councils have taken a more sceptical stance. For example, Reform-led Essex County Council has scrapped all net zero strategies and dissolved its Climate Action Commission, while Kent County Council has rescinded its climate emergency declaration.
Both Essex and Kent have recently joined the £120bn Border to Coast LGPS Pool, which offers partner funds investments in climate solutions through its climate opportunities funds and climate-tilted indices.
The updated guidance could allow funds remaining committed to tackling climate change to join forces within specific sub-groups, while funds that have abandoned their climate ambitions can take a more conservative stance without disrupting the wider pool’s operations.
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