Why have we developed a sustainable and responsible investment policy?

Local Government Super believes that a well-developed responsible investment strategy can both assist in generating long-term risk-controlled investment returns while also aligning ourselves with our members' environmental and social concerns.

Superior risk management

There is increasing recognition from the institutional investor groups that sustainability type risks - often called environmental, social and governance (ESG) can have material impacts on portfolio values and members long term investment returns required for their retirement.

Think of the catastrophic BP oil spill in the Gulf of Mexico in 2010 - not only did it wreak massive environmental damage and social upheaval for local communities it has also created problems for the investors in the company. BP's share price halved, its management attention is now preoccupied on remedial efforts; the company faces multi billion dollar compensation bill and additional liabilities and law suits are likely to go on for several years. Investors such as superannuation and pension funds suffered reduced values and investment returns due to the BP oil spill catastrophe.

Examples of ESG risks include themes such as:

• Directors election and excessive executive remuneration
• Supply chain management
• Occupational health and safety and other labour rights issues
• Human rights transgressions
• Long term liabilities from defective products (e.g. asbestos)
• Operating in remote and unstable regions and countries
• Strong global population growth and ageing demographics
• Managing community and other stakeholder relationships
• Long term depletion of natural resource and commodity reserves
• Food security and sustainable agriculture; and of course
• Climate change (which LGS considers to be one of the biggest long-term risks for our investment portfolio).

Common characteristics of these ESG risks are that they are:

• A relatively recent phenomenon whose materiality is likely to become even more significant in the future
• Long term and often future looking
• Often difficult to immediately quantify in dollar terms
• Likely to be facing increased punitive legislation in the future to address the risks - which may make the company or sector a less attractive investment
• When the risk is "triggered", is often compounded and creates reputational risk issues for the company and impacts its 'licence to operate'
• Create market opportunities for rival products that do not have the ESG risks or are solutions to the ESG risk (e.g. the emergence of clean technologies to address the threat of climate change)

Every investment asset is exposed to ESG risks to some degree. These need to be managed effectively. There have been multiple, high profile cases of mismanaged ESG risks that have resulted in significant losses of value to our investments in recent years.

However, the intangible and at times qualitative nature of ESG risk has not traditionally sat well with the short-term horizon and quantitative focus of financial markets. It is only recently that institutional investors, such as pension and super funds, have urged their fund managers for ESG risks to be systematically incorporated in their investment decision-making process.

LGS' responsible investment and ESG risk management practices aim to integrate, monitor and manage these ESG risks in order to safeguard members' long-term super savings.

ESG risk management is still in its relative infancy and LGS aims to apply best practice in this area. If you are interested in more information, please refer to:
Investor groups
Linking superannuation and sustainability

Alignment with member values

LGS draws the majority of our 90,000 members from local governments and shires across New South Wales. These organisations are at the forefront of implementing environmental and social regulations and support services across the community.

LGS' responsible investment practices have been well received by our members. LGS focus on implementing responsible and sustainable strategies across our investments is aligned to what many of our members are doing on a daily basis