Investment Strategy Statement





September 2021


Introduction and background

This is the Investment Strategy Statement (“ISS”) of the East Sussex Pension Fund (“the Fund”), which is administered by East Sussex County Council, (“the Administering Authority”). The ISS is made in accordance with Regulation 7 of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (“the Regulations”).

The ISS has been prepared by the Pension Committee (“the Committee”) having taken advice from the Fund’s investment adviser, Isio. The Committee acts on the delegated authority of the Administering Authority. The ISS, which was approved by the Committee on 28 September 2021, is subject to periodic review at least every three years and without delay after any significant change in investment policy. The Committee has consulted on the contents of the Fund’s investment strategy with such persons it considers appropriate.

The Committee seeks to invest in accordance with the ISS, any Fund money that is not needed immediately to make payments from the Fund. The ISS should be read in conjunction with the Fund’s Funding Strategy Statement.

The suitability of particular investments and types of investments

The primary objective of the Fund is to provide pension and lump sum benefits for members on their retirement and/or benefits on death, before or after retirement, for their dependents, on a defined benefits basis. This funding position will be reviewed at each triennial actuarial valuation, or more frequently as required.

The Committee aims to manage the Fund in such a manner that, in normal market conditions, all accrued benefits are fully covered by the value of the Fund's assets and that an appropriate level of contributions are agreed by the Fund employers to meet the cost of future benefits accruing. For employee members, benefits will be based on service completed but will take account of future salary and/or inflation increases in line with the relevant LGPS scheme rules.

The Committee has translated its objectives into a suitable strategic asset allocation benchmark for the Fund. This benchmark is consistent with the Committee’s views on the appropriate balance between generating a satisfactory long-term return on investments whilst taking account of market volatility and risk and the nature of the Fund’s liabilities. The Committee discuss the appropriateness of the Fund’s strategic asset allocation at least once a year.

The Fund carries out an asset liability modelling exercise in conjunction with each actuarial valuation. A number of different contribution and investment strategies are modelled and the future evolution of the Fund considered under a wide range of different scenarios. The Committee considers the chances of achieving their long term funding target and also considers the level of downside risk in the various strategies by identifying the low funding levels which might emerge in the event of poor outcomes.

This approach helps to ensure that the investment strategy takes due account of the maturity profile of the Fund (in terms of the relative proportions of liabilities in respect of pensioners, deferred and active members), together with the level of disclosed surplus or deficit (relative to the funding basis used).

In addition, the Committee monitors investment strategy on an ongoing basis, focusing on factors including, but not limited to:

·         Suitability given the Fund’s level of funding and liability profile

·         The level of expected risk

·         Outlook for asset returns

The Committee also monitors the Fund’s actual allocation on a regular basis to ensure it does not notably deviate from the target allocation and has implemented a rebalancing policy in Appendix A.

Investment of money in a wide variety of investments

Asset classes

The Fund may invest in quoted and unquoted securities of UK and overseas markets including equities, fixed interest and index linked bonds, cash, property and commodities, either directly or through the ACCESS LGPS pool. The Fund may also make use of contracts for differences and other derivatives either directly or in pooled funds investing in these products for the purpose of efficient portfolio management or to hedge specific risks.

The Committee reviews the nature of Fund investments on a regular basis, with particular reference to suitability and diversification. The Committee seeks and considers written advice from a suitably qualified person in undertaking such a review, in line with the LGPS (Management and Investment of Funds) Regulations 2016. If, at any time, investment in a security or product not previously known to the Committee is proposed, appropriate advice is sought and considered to ensure its suitability and diversification and training is provided, if relevant.

The Fund’s target investment strategy is set out below. The table also includes the maximum percentage of total Fund value that it will invest in these asset classes. In line with the 2016 Regulations, the authority’s investment strategy does not permit more than 5% of the total value of all investments of fund money to be invested in entities which are connected with that authority within the meaning of section 212 of the Local Government and Public Involvement in Health Act 2007.

Table 1: Fund allocation


Asset class

Previous target allocation %
September 2020

Target allocation %
July 2021

Maximum invested* %

Role within the Strategy

Global Equity




Growth Assets

Absolute Return




Part Growth Assets, Part Protection

Private Equity




Growth Assets





Income Assets

Inflation-Linked Property




Income Assets





Income Assets

Private Credit




Income Assets

Diversified Credit




Income Assets

Index-Linked Gilts




Protection Assets

Corporate Bonds




Protection Assets





Protection Assets







*The maximum invested figures are based on the rebalancing ranges agreed by the East Sussex Pension Committee within its rebalancing policy.

** Additional allowance to rebalancing figures whilst allocations to infrastructure, private debt and inflation linked property take place.


The Committee has appointed a number of investment managers all of whom are authorised under the Financial Services and Markets Act 2000 to undertake investment business.

Each investment manager has an agreed benchmarks to compare returns against, so that in aggregate, they are consistent with the overall asset allocation for the Fund. As the Fund does not invest in any segregated mandate these benchmarks are considered when assessing the appropriateness of a sub fund within the LGPS pool or on selection of a new pooled fund. The Fund’s investment managers will hold a mix of underlying holdings which reflects their views relative to their respective benchmarks. Within each major market and asset class, the managers will maintain diversified portfolios through direct investment or pooled vehicles.

When the Committee approves it’s new investment strategy, the Committee instruct officers and the Investment consultants to implement the strategic asset allocation investment decision. This can be by accessing a suitable sub fund from the ACCESS LGPS pool, where manager selection sits at pool level; or where there is no solution to implement the strategy through the LGPS pool, officers will carry out a manager selection process led by the Investment Consultant to short list the options available and assess these against the best strategic fit for the Fund. A recommendation is then laid out to the Committee as to the most suitable implementation solution to meet the approved investment strategy.

The approach to risk, including the ways in which risks are to be measured and managed

The Fund has a detailed Risk Management process in place which is documented in the Fund’s Risk Management Policy. A Risk Register is reported to Pension Committee and Pension Board quarterly for review and consideration, identifying the risk and the mitigations in place.

The principal risks affecting the Fund are set out below.

Funding risks

·         Financial mismatch – The risk that Fund assets fail to grow in line with the developing cost of meeting the liabilities.

·         Changing demographics –The risk that longevity improves and other demographic factors change, increasing the cost of Fund benefits.

·         Systemic risk - The possibility of an interlinked and simultaneous failure of several asset classes and/or investment managers, possibly compounded by financial ‘contagion’, resulting in an increase in the cost of meeting the Fund’s liabilities.

The Fund measures and manages financial mismatch in two ways. As indicated above, the Committee has set a strategic asset allocation benchmark for the Fund, which is reviewed on at least an annual basis. This benchmark was set taking into account asset liability modelling which focused on probability of success and level of downside risk.


The results from the 2019 valuation highlighted that the Fund - utilising its current stabilisation parameters for contributions has a good chance of being fully funded in future without adopting an over prudent approach towards its investment strategy. The Committee assesses risk relative to the strategic benchmark by monitoring the Fund’s asset allocation and investment returns quarterly. The Committee also assesses risk relative to liabilities by monitoring the funding position regularly.


The Committee reviews the demographic assumptions of the Fund every three years as part of its triennial valuation, to mitigate the risk that changes to longevity and other factors would have on the Fund. In addition the Fund meet regularly with the Fund Actuary to ensure any major swings in longevity assumptions due to environmental or medical changes can be identified early.


The Committee seeks to mitigate systemic risk through a diversified portfolio; across asset classes, sectors, geographical region, investment manager styles and considers correlation of risk and return across different asset classes in construction of the investment strategy. It is not possible to make specific provision for all possible eventualities that may arise under this heading.

Asset risks

·         Concentration - The risk that a significant allocation to any single asset category and its underperformance relative to expectation would result in difficulties in achieving funding objectives.

·         Illiquidity - The risk that the Fund cannot meet its immediate liabilities because it has insufficient liquid assets.

·         Currency risk – The risk that the currency of the Fund’s assets underperforms relative to Sterling (i.e. the currency of the liabilities).

·         Environmental, social and governance (“ESG”) – The risk that ESG related factors reduce the Fund’s ability to generate the long-term returns. The Fund believes that climate change poses material risks to the Fund but that it also presents positive investment opportunities.

·         Manager underperformance - The failure by the fund managers to achieve the rate of investment return assumed in setting their mandates.

The Committee measure and manage asset risks as follows.

The Fund’s strategic asset allocation benchmark invests in a diversified range of asset classes. The Committee has put in place rebalancing arrangements to ensure the Fund’s “actual allocation” does not deviate substantially from its target. The Fund invests in a range of investment mandates each of which has a defined objective, performance benchmark and manager process which, taken in aggregate, help reduce the Fund’s asset concentration risk. By investing across a range of assets, including liquid quoted equities and bonds, as well as property, the Committee has recognised the need for access to liquidity in the short term.

The Fund invests in a range of overseas markets which provides a diversified approach to currency markets; the Committee also assesses the Fund’s currency risk during their risk analysis.

Details of the Fund’s approach to managing ESG risks are set out later in this document.

The Committee has considered the risk of underperformance by any single investment manager and have attempted to reduce this risk by appointing more than one manager for various asset classes. In addition the Fund has an allocation to passive mandates which have a lower tracking error to the market, the Fund accesses these through products that have an ESG tilt. The Committee assess the Fund’s managers’ performance on a regular basis, and will take steps, including potentially replacing one or more of their managers, if underperformance persists or there are other concerns with the investment management or philosophy.

Other provider risk

·         Transition risk - The risk of incurring unexpected costs in relation to the transition of assets among managers. When carrying out significant transitions, the Committee seeks suitable professional advice.

·            Custody risk - The risk of losing economic rights to Fund assets, when held in custody or when being traded.

·            Credit default - The possibility of default of a counterparty in meeting its obligations.

·            Stock Lending- The Fund will participate in any stock-lending arrangements in the future as part of the LGPS ACCESS pool. The Fund will ensure that robust controls are in place to protect the security of assets before entering into any stock lending arrangements. The manager(s) of pooled funds may undertake a certain amount of stock lending on behalf of unit-holders. Where a pooled fund engages in this activity the extent is fully disclosed by the manager (unless the assets are invested in LGPS pooled arrangements in which case this will be delegated to the Pool Operator).

The Fund monitors and manages risks in these areas through a process of regular scrutiny of its providers, and audit of the operations it conducts, or has delegated such monitoring and management of risk to the appointed investment managers or ACCESS LGPS pool as appropriate (e.g. custody risk in relation to pooled funds). The Committee has the power to replace a provider should serious concerns exist.

The approach to pooling investments, including the use of collective investment vehicles and shared services

The Fund is a participating scheme in the ACCESS Pool. The ACCESS pool was set up following the 2015 Investment reform criteria and pooling guidance published in 2015.

Assets to be invested in the Pool

The Fund’s intention is to invest its assets through the ACCESS Pool as and when suitable Pool investment solutions become available. The ACCESS Pool has launched several sub-funds in which the East Sussex Pension Fund now participates and there are further launches planned for in the coming years in which East Sussex plan to be involved with.

The Fund holds investments with Longview, Ruffer,  Newton and M&G through the ACCESS Authorised Contractual Scheme (ACS). In addition, the Fund has some remaining passive exposure to UBS which is also governed through the ACCESS pool.

An indicative timetable for investing through the Pool was set out in the July 2016 submission to Government. They key criteria for assessment of Pool solutions will be as follows:

1.   That the Pool enables access to an appropriate solution that meets the objectives and benchmark criteria set by the Fund

2.   That there is a clear financial benefit to the Fund in investing in the solution offered by the Pool, should a
change of provider be necessary.

At the time of preparing this statement the Fund has elected not to invest the following assets via the ACCESS Pool:

Table 2 Assets held outside the pool

Asset class


Target % of Fund assets


Reason for not investing via the ACCESS Pool

Active Sustainable Equity and ESG tilted passive equity

WHEB /Wellington

/ Storebrand



MSCI All Countries World

Currently, there are no funds available through the ACCESS funds platform that satisfy the Funds Responsible Investment requirements for active sustainable equity and systematic ESG/Carbon tilted portfolio. These will be held outside the pool temporarily until the pool is able to launch RI investment options.

Private Equity

Harbourvest Partners / Adam Street Partners


MSCI All Countries World

Existing illiquid asset programmes will run off at normal lifecycle to avoid crystallising exit costs and loss of illiquidity premium earned.


M & G Infracapital / UBS Infrastructure / Pantheon



Existing illiquid asset programmes will run off at normal lifecycle to avoid crystallising exit costs and loss of illiquidity premium earned.

Private Debt

M & G



Existing illiquid asset programmes will run off at normal lifecycle to avoid crystallising exit costs and loss of illiquidity premium earned.

Operational cash

East Sussex County Council



East Sussex Pension Fund needs to manage its cash flow to meet statutory liabilities, including monthly pension payroll payments, therefore, a reasonable level of operational cash will be required to maintain efficient administration of schemes and would be held outside the Pool.


Any assets not currently invested in the Pool will be reviewed at least every three years to determine whether the rationale remains appropriate, and whether it continues to demonstrate value for money. The next such review will take place no later than 2022.

Structure and governance of the ACCESS Pool

East Sussex is a member of the ACCESS pool along with the following 10 other pension funds:

Cambridgeshire                                 Kent

Essex                                               Norfolk

Hampshire                                         West Northamptonshire

Hertfordshire                                     Suffolk

Isle of Wight                                      West Sussex

All eleven funds are committed to collaboratively working together to meet the criteria for pooling and have signed a Memorandum of Understanding to underpin their partnership. ACCESS is working to a business plan in order to create the appropriate means to pool investments.


The ACCESS Funds have set out how they meet the pooling criteria, the pool’s structure, governance arrangements and services to be shared in the submission made to the Government in July 2016, which is available on ACCESS’s website The pool made further representations to the Government annually to report  savings achieved by the LGPS pool.

The “ACCESS Pool” is not a legal entity. However a Joint Committee (JC), comprising elected Pension Committee Chairmen from each Administering Authority and supported by the Officer Working Group has been established via an Inter Authority Agreement. Papers from previous and future ACCESS JC meetings papers can be found using the following link:

ACCESS has taken advice on its sub-fund design and development of investment opportunities available. The pool appointed Link Fund Solutions to establish and operate the ACS carrying out all the FCA regulated aspects of the pool on liquid assets. Link are responsible for the overall management of the ACS including the creation of investment sub funds and the appointment of Investment managers on this platform. A through due diligence process is undertaken before the Investment Managers are appointed and robust monitoring and governance is applied to the managers on an ongoing basis. The ACS manages a significant portion of participating Authorities’ liquid assets.

Passive assets are considered to be Investments under Pool Governance. The value of assets held within the Pool includes passively managed assets which are held in Life Policies. The Life Policies themselves will necessarily remain an agreement between the participating Authority and the appointed external investment manager. This was acknowledged as an acceptable outcome by Government. All passive assets will therefore be held out-side the ACS and will not be managed or administered by the Pool Operator.

The exercise of rights (including voting rights) attaching to investments Voting rights

The Committee has delegated the exercise of voting rights to the investment manager(s) on the basis that voting power will be exercised by them with the objective of preserving and enhancing long term shareholder value. Accordingly, the Fund’s managers have produced written guidelines of their process and practice in this regard, which is considered as part of the appointment of an investment manager process. The managers are strongly encouraged to vote in line with their guidelines in respect of all resolutions at annual and extraordinary general meetings of companies under Regulation 7(2)(f). The Fund is a member of the Local Authority Pension Fund Forum (LAPFF) and will ask Investment managers to vote in accordance with a voting alert from LAPFF or explain why they have voted differently.  The Fund publish an annual report of voting activity as part of the Fund’s annual report. In addition, the ACCESS pool operator has set a voting guidance policy to all managers within the ACS structure.


The Fund understands that stewardship aims to promote the long term success of companies in such a way that the ultimate providers of capital also prosper. The Committee has formally agreed to adhere to the Stewardship Code as published by the Financial Reporting Council, the Fund will be producing the first submission under the 2020 Stewardship code in 2022. A copy of the Fund’s statement of compliance under the 2012Stewardship code can be found on the Fund’s website

In addition to its own commitment to the Stewardship code the Fund expects its investment managers to also be signatories or comply with the Stewardship Code as published by the Financial Reporting Council. Under the 2012 code, Asset manager signatories were  categorised in three tiers.

·         Tier 1 – Signatories provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary.

·         Tier 2 – Signatories meet many of the reporting expectations but report less transparently on their approach to stewardship or do not provide explanations where they depart from provisions of the Code.

·         Tier 3 – Significant reporting improvements need to be made to ensure the approach is more transparent. Signatories have not engaged with the process of improving their statements and their statements continue to be generic and provide no, or poor, explanations where they depart from provisions of the Code.

The 2020 Stewardship code is still in its infancy so the Fund, and Investment managers are only just submitting their first submissions at the time of publishing this document.

The Committee expects both the ACCESS Pool and any directly appointed fund managers to also comply with the Stewardship Code.

In addition to the Fund’s views on the Stewardship Code, the Fund believes in collective engagement and is a member of the LAPFF, the UN Principles of Responsible Investment (PRI) and the Institutional Investors Group on Climate Change (IIGCC) , through which it collectively exercises a voice across a number of ESG principles including climate change. The Fund expects as a minimum, all its liquid investment managers to also be signatories of IIGCC and PRI.



Investment Management Stewardship Code tier and collaborative engagement membership



PRI Signatory date

Stewardship Code 2012


Longview Global Equity


Tier 1


M&G Absolute Return


Tier 1


M&G Corporate Bonds


Tier 1


UBS Europe Ex UK Equities


Tier 1


UBS North America


Tier 1


UBS Rest of the World


Tier 1


UBS UK Equities


Tier 1


Newton Absolute Return


Tier 1


Ruffer Absolute Return


Tier 1


Pantheon Infrastructure




WHEB - Sustainability Fund


Tier 1


ATLAS Global Infrastructure Equity Fund




Wellington – Global Impact Fund


Tier 1


Storebrand – Global ESG Plus Fund




Harbourvest – Private Equity




Adams Street – Private Equity




Schroders – Property


Tier 1


M&G Infrastructure


Tier 1




Appendix A Rebalancing Policy

Appendix B Statement of Responsible Investment Principles


Appendix A

Rebalancing Policy


November 2020

Rebalancing Ranges

The following ranges have been agreed by the Committee to set as points at which rebalancing should take place.


Asset class

Strategic target




Listed Equities


35.0 45.0

Private Equity


3.5 7.5

Absolute Return


14.0 20.0

Total Growth





8.0 14.0



4.0 – 13.0

Private Credit


2.0 7.0

Total Income



Diversified Credit


7.0 - 12.0









0.0 2.0

Total Protection


7.0 – 11.0





Rebalancing for the Fund General Rules

The following general rules will determine how a rebalancing process for the Fund will operate.

·            Rebalancing would apply only to equities, absolute return funds and bonds - Due to the transaction costs and illiquidity associated with the other investments such as property, rebalancing for those asset classes will be considered on an annual/ad hoc basis;

·            Rebalancing would be monitored on a quarterly basis

·            Each benchmark allocation would have a weighted tolerance range A tolerance range will be defined for growth and matching assets and each underlying mandate; these tolerance ranges will be used in determining when rebalancing will occur;

·            Cash holdings to be used for rebalancing. Where possible any net investments or disinvestments should be used to manage allocations, for example, by investing any surplus cash into the most underweight asset class.

·            Rebalancing will occur at two levels; at the growth vs matching level, and at the mandate level The rebalancing process will determine if rebalancing is required between growth and matching assets, and separately if rebalancing is required between asset classes. However, it is more important to be willing to incur transaction costs if necessary to rebalance between bonds and equities, for example, than switching between managers with similar mandates.

·            Rebalancing transactions will aim to rebalance allocations out with their tolerance ranges to the midpoint (at least) of the tolerance range The mid-point of the tolerance range is the mid-point between a benchmark allocation and its upper or lower tolerance limit. Assuming an asset class with a 60% allocation and a 54%-66% tolerance range, the upper mid-point would be the halfway point between 60-66% (i.e. 63%). The lower mid-point would be the halfway point between 54% and 60% (i.e. 57%). Analysis suggests that this is the best way of balancing the impact of transaction costs against returns.

The allocations to private equity and infrastructure (and to a lesser extent property) will vary with general market movements and are not easily altered, due to the illiquid nature of the asset classes. Therefore we do not anticipate any rebalancing being carried out in relation to the Fund’s private equity or infrastructure investments.

Due to the nature of illiquid assets with timeliness of access to the market and long commitment call down periods, the illiquid assets will often be adrift of the strategic asset allocation while money is awaiting to be called by the investment managers, so these allocations will often be held in a low volatility liquid asset classes in the interim.




Appendix B

Statement of Responsible Investment Principles


September 2020

1. Introduction

·                At East Sussex Pension Fund (ESPF), we believe that Responsible Investment (RI) supports the purpose of the Local Government Pension Scheme (LGPS) – the provision of retirement income for individuals.  We believe that it should reduce the risk associated with the invested assets that the Fund owns to pay pensions when they are due.  Responsible investment is therefore a substantial factor driving returns alongside other investment considerations.

·                This Statement of Responsible Investment Principles (SRIP) complements ESPF’s Investment Strategy Statement (ISS), which is a statutory requirement codified in the Local Government Pension Scheme (Management and Investment of Funds) (England) Regulations 2016.  The SRIP explains our (ESPF’s) approach to the oversight and monitoring of the Fund’s investment activities from a Responsible Investment (RI) and Stewardship perspective.

·                RI is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and to generate sustainable, long-term returns (according to Principles for Responsible Investment).   Stewardship is the responsible allocation and management of capital across the institutional investment community to create sustainable value for beneficiaries, the economy and society.

·                While acknowledging the potential benefits of incorporating ESG factors into the investment process, the Fund recognises that there are many different approaches, there is no universally agreed standard of ESG measurement or assessment, and some methodologies may enhance returns while others may not. There may also be inherent conflicts between the Environmental, Social and Governance factors forming the ESG framework.

·                As a consequence, while acknowledging the opportunities for these factors to reduce risk and highlight opportunity, careful attention is required in manager or index selection to methodologies which incorporate both qualitative, quantitative and forward-looking approaches.

·                ESPF believes that ESG opportunities may be found in Impact Funds investing in companies whose profits are derived from providing solutions to some of the World’s more serious environmental, sustainability, demographic and social challenges e.g. cleaner products and processes, renewable energy, health, nutrition, sustainable agriculture, shelter, clean water and sanitation etc. Where successful, such companies might be expected to exhibit above average long-term growth characteristics.

·                RI is not the same as Ethical Investment (EI).  EI is an investment approach determined by an investor's specific views, usually based on a set of personal values. These values can take precedence over financial considerations.  ESPF should not be considered as either an “Ethical” or an “Unethical” investor, but as a responsible steward of capital.  The management of ESG issues is a question of identifying and mitigating material financial risks, not a question of ethics.

·                At ESPF, we are guided in our roles as quasi-trustees, executive officers and investment managers by the legal principle of fiduciary duty. Guidance on our fiduciary responsibilities is provided by the Scheme Advisory Board, which took legal advice on this matter (  It advises the English Government (the Responsible Authority for the Fund) and English LGPS Funds themselves on policy issues. 

·                The ESCC Pensions Committee (the Committee), comprising elected councillors, is responsible for fund oversight and policy setting.  In carrying out its obligations, this group of quasi-trustees must take into consideration the views of its main stakeholders, members and employers.

·                The East Sussex County Council (ESCC) is the administering authority for the Fund, but the Fund is neither owned nor controlled by ESCC.  Pension fund assets, which are earmarked for pension payments over the life of the fund, are ringfenced from ‘Council Money’.  There are around 130 employers and more than 78,000 members, whose pension payments will be funded by these and further employer and member contributions. The Fund’s investment policy cannot be influenced by outside parties or by personal, political or moral beliefs. The Fund must seek to find a balance between its statutory and fiduciary obligations, and the views and interests of all of its member stakeholders.

2. Annual review

The SRIP will be subject to review by the Committee at least annually.

3. Objectives of ESPF’s Statement of Responsible Investment Principles

The objectives of ESPF’s RI policy are to:

1           reduce the likelihood that ESG issues and Climate Risk (CR) will negatively impact asset values and returns;

2           inform stakeholders on the action ESPF is taking to address and manage ESG and CR issues.

4. Responsible Investment Beliefs

The following beliefs in respect of RI underpin ESPF’s RI principles and policies. ESPF believes that:

1           ESG issues and CR can present material financial risks to asset values and returns;

2           Implementation of effective RI policies can reduce risk and has potential to enhance returns;

3           Engagement with investment managers (“IMs”) and investee companies can be effective in protecting and enhancing the long term value of investments;

4           Collaboration with other asset owners and IMs will help improve the effectiveness of engagement on ESG and CR issues;

5           Effective oversight of RI requires monitoring of ESG and CR metrics and the actions of IMs and investee companies;

6           RI is aligned with ESPF’s fiduciary responsibilities in the management and oversight of ESPF’s investments.

5. Responsible Investment Principles and ESPF Approach

ESPF is a signatory to the United Nations Principles for Responsible Investment (PRI), an organisation which supports and enables asset owners and asset managers to work collaboratively towards RI best practice. As a signatory, ESPF has committed to implement the six principles with the aspiration of contributing to the development of a more sustainable global financial system.

Principle 1

We will incorporate ESG issues into investment analysis and decision-making processes.

ESPF approach: The implementation of ESPF’s investment strategy is delegated by the Pensions Committee to officers and external investment managers (IMs) to invest the Fund’s assets. 

How ESG factors are incorporated into investment analysis and decision-making processes varies according to the asset category and manager. All investments are externally managed; however, asset managers are required to have regard for the government’s consultation on integrated risk management of climate change[1].

The Fund gains its exposure to equity markets by recourse to a combination of Active managers and Passive index funds. The holdings of Active Managers are by their nature transitory and subject to continual change through the manager’s stock selection process. Managers of index funds replicate an index and so bake in a longer run exposure to companies and sectors over which limited due diligence is performed. The choice of passive index is therefore an important deliberation. Where possible, the Fund seeks to acquire exposure to indices that are tilted in favour of companies that benefit from greener revenues, are less carbon intensive, and are better positioned than their peers to adapt to the Energy Transition. In some markets this option is not possible.

The ESPF have the following categories of asset managers:   

Active Equity managers (segregated and pooled funds):As a part of the appointment process, we ensure that Managers demonstrate that they incorporate ESG filters into their investment analysis and asset acquisition processes. We monitor the managers’ performance on a quarterly basis alongside all other investment matters, and review the PRI transparency reports of external managers, where available. Managers are encouraged to join PRI, IIGCC and Climate Action 100+ as signatories, where they are not already members.

Passive Index Funds with ESG tilts: Passive indices offer a low-cost complement to Active Managers. We select Passive indices based on the index’s ability to reduce exposure to climate risks and to capture opportunities for investment in companies that are forward looking, generating green revenues, and better aligned to navigating the Energy Transition

Passive Index Funds without ESG tilts: the Fund can hold other forms of Passive investment to gain exposure to markets at lower cost such as Emerging Markets. These market cap indices are not adjusted to reflect ESG or responsible investment criteria. Corporate Credit managers: during the appointment process, we assess the approach of managers to incorporating ESG issues into their investment analysis and decision-making processes.  We monitor the managers’ implementation of the approach on a quarterly basis alongside all other investment matters, and review the PRI transparency reports of external managers, where available. It is our ambition to appoint managers who devote greater focus in providing finance to companies or projects that are more compatible with the aims of the Paris Agreement.

Property managers: The capacity for Managers to incorporate ESG factors into the investment process alongside other key investment criteria will be required, monitored, and regularly reviewed. Managers will be encouraged to adopt PRI Transparency and GRESB reporting and to utilise CRREM assessment tools, as recommended by the IIGCC, in assessing their property portfolio alignment with the Energy Transition.

Real Asset management (infrastructure) managers: during the appointment process, we assess the approach of managers to incorporating ESG issues into their investment analysis and decision-making processes. We monitor the managers’ implementation of the approach on a quarterly basis alongside all other investment matters, and review PRI transparency and GRESB reports of external managers, where available.

Principle 2

We will be active owners and incorporate ESG issues into our ownership policies and practices.

ESPF approach:

Voting: The Fund’s asset managers vote on resolutions at the Annual General Meetings (AGM) and Extraordinary General Meetings (EGM) of the Fund’s equity holdings.

Shareholder resolutions: The Fund’s asset managers also file or co-file shareholder resolutions on important issues at the Fund’s investee companies in the interests of agitating for better governance.

Stock lending: ESPF does not participate in direct stock lending but may invest in investment funds which use stock-lending.

Corporate engagement: The Fund’s managers engage with our investee companies on material ESG issues. The Fund are members of the LAPFF, IIGCC, Climate Action 100+ and the UNPRI.

Government engagement: we engage with government through responding to government consultations and aim to influence policy makers through the Funds collaborative engagement groups initiatives.

Manager monitoring: we actively and regularly monitor the approach of our investment managers to ESG issues, and what portfolio activity has occurred as a result of managing ESG risks. In addition, the Fund monitor its ESG impact assessment report annually and propose initiatives or actions for managers to consider as enhancements to their ESG practices.

Principle 3

We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Investee companies: through our investment managers we encourage the companies, whose shares the Fund owns, to report on relevant ESG metrics. These include the reporting of greenhouse gas emissions in line with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD).

Investment Managers: we encourage the Fund’s investment managers to provide transparency by reporting relevant and accessible ESG-related information. This includes their commitments to and alignment with the UK Stewardship Code 2020, the TCFD, the PRI and GRESB, where appropriate.

Principle 4

We will promote acceptance and implementation of the Principles within the investment industry.

Commitment to PRI: we are transparent about being a signatory to the PRI and about how we implement the Principles. The Committee monitors its carbon footprint and energy transition at portfolio level and asset manager level. The Committee also review asset manager voting and engagement on a quarterly basis. The quarterly reports are published on the Fund’s website to demonstrate implementation of the Principles and to promote them. 

Investment Managers: we endorse the Principles to our managers and encourage them to become full signatories to PRI. Where this is not possible, we encourage our managers to use the six principles to guide their RI approach.

Partnership with PRI: we partner with PRI to promote the universal use of the principles, and work with PRI during any consultations to improve the effectiveness of the principles and further improve RI adherence across the industry.

Principle 5

We will work together to enhance our effectiveness in implementing the Principles.

Collective Approach: we are committed to working collaboratively to increase the reach, efficiency and effectiveness of RI.  We work with a host of like-minded partner funds, service providers and related organisations striving to attain best practice in the industry and to improve industry standards.   A list of our collaborative partners and their roles are available on our website.

Principle 6

We will each report on our activities and progress towards implementing the Principles.

PRI Assessment: we provide extensive details of our investment activities annually to the PRI for its independent assessment of our approach to RI.

PRI Reports: we publish our PRI transparency report annually on our website and we publish our PRI assessment results on our website and in our annual report.

TCFD: we are committed to report annually in accordance with Taskforce for Climate-related Financial Disclosures (TCFD) recommendations.

UK Stewardship Code: we report annually in accordance with the UK Stewardship Code requirements, and we are committed to adhering with the requirements of the new UK Stewardship Code 2020.

6. Integrating RI into Strategy Implementation

·                At ESPF we are committed to acting as responsible investors and fully integrating our approach to ESG and CR into investment processes.

·                The Fund’s approach is to invest in companies that have a high and sustainable return on investment.

·                The Fund does not exclude companies from its investible universe on the basis of their participation in certain industries. Rather the emphasis is on assessing the sustainability element of a company’s returns. 

·                Fully integrating ESG into the Fund’s investment process means that the Committee, the legal person making the investment decision and the ‘risk taker’ is in possession of all the facts, it can determine how ESG impacts the investment case, including valuation and is in a position to engage with the managers of the business representing the interests of asset owners. This approach ensures that there is no gap between the assessment of ESG and the investment decision. Both are embodied in one decision by the Pension Committee. Short-termism and viewing ESG as an overlay to other assessment criterion is a sub-optimal approach.

7. Engagement with investee companies

·                The Fund scrutinises governance at every stage of our investment process and aims to influence governance through voting and engagement. This is an integral part of what makes a business sustainable, successful and a suitable investment target. 

·                We will engage with their investee companies and appointed managers, either directly or via their collaborative partners. Where material risks remain following engagement activity, we retain the ability to divest, since the failure to engage destroys value in the longer term. The issue of engagement is a vital aspect of ownership.

·                The Fund entrusts its assets to investment managers whose duty it is to represent the Fund’s interest. Representing the Fund’s interests as owners through engagement increases the Fund’s knowledge and understanding of the company and leads to more accurate assessment of the firm’s risks and opportunities and therefore the valuation assumption. Engagement through voting can effect corporate change and improve businesses to derive a broader social benefit.

8. Energy Transition

·                The Fund recognises that a prolonged Energy Transition is under way. It also acknowledges that a number of energy incumbents through their size, capacity to mobilise capital and engineering expertise offer the potential to play a substantial role in that transition. It seeks to balance the economic reality that fossil fuels currently provide 80% of the world’s primary energy and that energy demand will grow by up to 50% by 2050, with global commitments, as yet not fully backed by detailed policy, to decarbonise the energy system by the second half of the century. Where viable opportunities arise, the Fund will seek to increase its exposure to renewable infrastructure assets. 

·                The Fund is aware that there are a range of possible transition scenarios, evolving physical climate related risks and potential opportunities. There are also many uncertainties. This makes portfolio construction around such scenarios very challenging. Instead, ESPF seeks to broadly align its investment approach with the objectives of IIGCC and Climate Action 100+ initiatives.


9. Climate Change & Compliance with Taskforce for Climate-related Financial Disclosures (TCFD)

ESPF recognises the importance of the Paris Agreement of the United Nations Framework Convention on Climate Change[2]. The central aim of the agreement is to strengthen the response to the global threat of climate change by:

·                keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius;

·                strengthening the ability of countries to deal with the impacts of climate change through appropriate financial flows, a new technology framework and an enhanced capacity building framework;

·                enhancing transparency of action and support through a more robust transparency framework.

ESPF understands that the Paris Agreement is creating change that represents both significant risks to, and opportunities for, the Fund.

As such we make the following commitments to climate monitoring and action:

·                To continue to measure and report on carbon-equivalent emissions throughout the equity portfolios

·                To continue our work with IIGCC and Climate Action 100+

·                To continue to research and support the deployment of new impact capital into projects set to benefit from the transition to a low carbon economy

·                To assess the carbon intensity of all assets (using estimates if necessary) by the end-2022 reporting cycle, supported by external managers and GPs

·                Using data from the Transition Pathway Initiative (TPI), to engage alongside our collaborative partners to encourage companies to adopt business models and strategies that are in line with the aims of the Paris agreements.

·                Financial returns from current and future investments will affect ESPF’s ability to fund future pension payments, and so we have committed to implement processes that adhere to TCFD recommendations on mandatory reporting and governance requirements related to climate risk as they are expected to apply to the LGPS, namely:

(i) Governance: The Pensions Committee monitors stewardship of the Fund’s assets through its submission of the Stewardship Code. The first submission in line with the 2020 Stewardship Code is planned for April 2022 and thereafter annually.  This includes reporting on RI issues and specific climate-related risks and opportunities. The Pensions Committee and Pension Board are committed to undertake a comprehensive CPD programme through physical, online training and/or personal reading on RI issues and climate change-related risks and opportunities. The Pensions Committee:

-            affirms the Fund’s commitment to integrate environmental, social and governance (ESG) considerations, such as carbon efficiency trends into its decision-making;

-            delegates scrutiny and engagement with investment managers to Fund officers with advice from the Investment Working Group to ensure that they take ESG issues, including climate change and carbon risk, into account in their investment decision-making;

-            affirms the Fund’s policy of not divesting solely on the grounds of non-financial factors;

-            notes that the Fund will monitor research on the link between ESG factors (including carbon-related factors) and financial performance to inform future investment strategy, such as stock selection criteria for quantitative strategies;

-            agrees that the Fund will use its shareholdings in companies that perform poorly on carbon efficiency measures to influence engagement activity.

(ii) Strategy: We work individually and with our collaborative partners to drive for openness and transparency on climate related issues affecting our investments.

-            ESPF will review annually all strategy mandates and managers against climate metrics (e.g. impact on portfolio, manager compliance, exposure to certain sectors)

-            We will review the weakest mandates based on this analysis and determine what action will be taken

-            We will consider options for scenario analysis in respect of the Fund’s mandates 


(iii) Risk Management: We subscribe to data services and analytical tools, including company and industry specific data, and scenario models, to help understand and manage the climate risk within the Fund.  Ways in which this data will be used for risk management include:

-            Assessment of all existing mandates against quantitative risk metrics such as Weighted Average Carbon Intensity “WACI” on a regular basis. We will work to develop risk metrics appropriate to each mandate

-            For all new mandates we will consider climate-related risks and objectives explicitly

-            Engagement with managers on specific issues and risks identified by the data


(iv) Monitoring, Metrics* and Targets: We use various monitoring tools with the aim of mitigating risk to Fund assets from trends towards net-zero carbon and more broadly from climate change.  We will select at least one Green House Gas (GHG) emissions and one non-emissions metric against which to assess Fund assets on climate related risks and opportunities as proposed under TCFD.  At least annually, we will set one target to manage climate related risk with respect to the chosen metrics and measure performance against this target.. All decision making, and investment monitoring, considers climate related risk and opportunities We will develop regular reporting of ESG and CR metrics to inform decision making and help assess and monitor progress towards our RI objectives.

*Carbon Analysis: We note that carbon-equivalent foot printing produces simple metrics that can be misinterpreted.  It encourages selective divestment of the shares of high emission companies as some investors ‘greenwash’ their portfolios.  Rather than divesting, we encourage our managers to incorporate an analysis of carbon output into their risk assessment of individual companies and their stocks.  In addition, we actively engage with companies to align their business strategies with the targets of the Paris Agreement. Where analysis of carbon risk (or any other risk) points to poor financial outcomes, divestment is, of course, an option.


[1] The government consultation issued in March 2020, “Aligning Your Pension Scheme with TCFD Recommendations” which ended on 2 July 2020 includes recommendations within that consultation for asset managers to carry out climate scenario analysis in relation to portfolios which they administer on the Fund’s behalf. Where the manager carries out scenario analysis, the Fund is recommended to ask for details of the scenarios as well as the output of the analysis in relation to the Fund’s portfolio. Where portfolio-level analysis is not available, the Fund is recommended to ask for the results of any other analysis that the asset manager is using to identify and assess climate-related risks in relation to the portfolio, such as carbon footprint data. The Fund is also recommended to ask what the asset managers are doing differently as a result of the analysis, to mitigate the risks. Where no scenario analysis is taking place, particularly for easier-to-analyse asset classes such as equities and corporate bonds, the Fund is recommended to ask about asset managers’ plans for adopting scenario analysis and encourage faster action if this is not ambitious enough.