Case Study | LD Pensions

LD Pensions: a Future-Fit investment strategy

Founded in the 1970s by the Danish parliament, LD Pensions comprises two pension funds – the mature “Lønmodtagernes Dyrtidsfond”, which manages c.$5.9 billion and, following new legislation coming into effect in 2020, a $15 billion fund to manage and administrate holiday-related pay.

ESG issues have always been a concern for the pension fund and are a topic that it anticipates will only become more prominent in the coming years. LD Pensions foresees upward trends in both member engagement with these issues and more definitive legislation around sustainability integration and disclosure. This, combined with a strong sense of social responsibility and a desire to support the UN SDGs, has led to discussions around how to ensure that the companies they invest in operate sustainably and act responsibly towards the environment and society.

“Pension funds like ourselves have been part of a return-seeking environment where shareholder return has been the only focus, leaving externalities to society to deal with. We must be part of the solution going forward.”

Kristoffer Fabricius Birch, Head of Equities at LD Pensions

Changing behaviour

According to the Head of Equities, Kristoffer Birch, divestment is not the answer. “Someone will always buy our shares, and who knows what they will do in terms of voting and engagement. One theory of divesting is that you only make the companies cheaper to buy for others, resulting in higher expected returns for them”. To have a meaningful effect, he reasons, funds must therefore either allocate money to purposefully impactful projects or actively engage corporates to try and drive behavioural change.

LD Pensions wants to move its entire portfolio in the right direction whilst minimizing risk for its members and therefore sees engagement as the more powerful tool. It wants to instigate more sustainable decision-making among the management and boards of its portfolio companies. A key part of this depends on propagating transparency and the adoption of effective sustainability-related indicators, which is why the scheme has decided to work with the Future-Fit Business Benchmark.

“If management has transparency and reliable ESG indicators, they will change behaviour. That is why Future-Fit is the best framework we have seen.”

Kristoffer Fabricius Birch, Head of Equities at LD Pensions

Using the Benchmark for investment decisions

The Future-Fit Business Benchmark provides a set of 23 forward-looking “Break-Even Goals” that define the line in the sand every company must reach in order to guarantee it is in no way harming people or planet. LD Pensions is keen to promote the logic and accompanying progress indicators of these goals amongst its investees. Due to the outsourced nature of its operations, the scheme does not directly communicate with the companies it invests in; rather its influence lies in the realm of how it selects its managers and how they, in turn, will interact with the companies. As an attractive partner, with significant new assets due in the coming months, the organization is strategically leveraging its relationship with these managers to encourage them to promote the Future-Fit way of thinking. When selecting managers, LD Pensions will score their willingness to take the Future-Fit Business Benchmark directly to prospective companies.

Furthermore, LD Pensions is seeking to go beyond just “doing less harm” by also implementing the other side of the Benchmark – the “Positive Pursuits” which describe any activity which helps speed the transition to a truly sustainable society. The scheme has just launched the world’s first tender process to find an investment manager for an active global equity mandate worth €160 million, premised on the Future-Fit Positive Pursuits. The investment universe will be limited to companies with a purpose, product or service that accords with at least one of the 24 Positive Pursuit categories. As a result, potential investees will only meet the criteria if they create positive impact themselves, amplify the positive impacts of others, or reduce the negative impacts of others.

By integrating the Benchmark into daily interactions and investment decisions, LD Pensions is ensuring that, even though it does not have direct relationships with companies itself, it is using its influence in innovative ways to instigate meaningful change that will help move society in the right direction.

 

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