The first Local Government Pension Scheme climate risk reports will be completed by December 2024, with which administering authorities will set out their strategies and metrics for managing climate-related risks and opportunities, according to a new government consultation.
The regulations will apply to all LGPS authorities in England and Wales and come into force by April 2023, covering a first reporting period of 2023-24, the consultation by the Department for Levelling Up, Housing and Communities stated.
“The primary purpose of LGPS investments is to meet the scheme’s long-term pension liabilities by balancing risk and return appropriately,” it said.
“However, the LGPS’s scale and market power give it an opportunity to drive change through the investment chain through asset managers to investee companies.”
We are wary of making the content of the climate risk report mandatory
Philip Pearson, Hymans Robertson
The consultation, published on September 1, will run for 12 weeks to November 24 2022.
The LGPS Scheme Advisory Board pressed two government ministers in August for a timetable for these reforms amid fears that ministerial upheaval could lead to delays in pensions policy areas.
Private sector scheme requirements are starting point
In 2020, the government announced that disclosures in line with recommendations made by the Task Force on Climate-related Financial Disclosures in 2017 would be compulsory across the UK economy by 2025.
The government closed its consultation on improving climate reporting by occupational schemes in July 2021. “Come 2023, the vast majority of assets will be invested with pension scheme trustees, asset managers and insurers who are disclosing climate-related financial risks and opportunities” in line with TCFD, pensions minister Guy Opperman said at the time.
“The government’s view is that the requirements for the LGPS should set as high a standard as for private schemes,” the DLUHC said in its consultation.
“We have therefore made the requirements for private schemes the starting point for our proposals but have aimed to take account of the unique features of the LGPS, including its local administration and democratic accountability through the [administering authorities].”
Private schemes with assets of at least £5bn are already in scope with the Department for Work and Pensions’ climate reporting requirements, which came into force in October 2021. Those with assets of at least £1bn will come under the regime in October 2022, while schemes with less than £1bn in assets are not currently covered.
All LGPS funds in England and Wales, however, will have to comply with the government’s latest climate reporting proposals, regardless of size.
Another key difference between rules governing LGPS funds and the private sector is the compulsory nature of the proposed requirement for the former to report data quality as a metric.
“We recognise that larger LGPS funds are likely to have more capacity to meet new requirements than smaller funds,” the government said.
“However, our view is that it would not be right to stage implementation within a single pension scheme in which all funds face climate risks, are democratically accountable, and subject to high external scrutiny.”
Aegon head of pensions Kate Smith said that it is only right that the LGPS, “as one of the UK’s largest pension schemes, is brought in line with the private pensions sector with reporting on climate-related risks and opportunities”.
“As the LGPS will have over a year to plan for this new regulatory requirement, they will be able to take learnings from these private sector reports which are expected to evolve over time.”
Should reporting be mandatory?
The government has proposed that LGPS authorities maintain oversight of climate-linked risks and opportunities, and consider their impact on their funding and investment strategies.
They will also need to perform two sets of scenario analysis at least once during their reporting periods, relating to their funding and investment approaches. One must be aligned with the Paris climate targets, assuming a 1.5C to 2C temperature increase above pre-industrial levels, while the other scenario will be at the choice of the administering authority.
Authorities will be expected to report on metrics that cover “absolute emissions”, “emissions intensity”, data quality and their alignment with the Paris goals. They will need to set a non-binding target in relation to one metric, with progress assessed once a year.
Scheme advisory boards, meanwhile, will be asked to prepare an annual “scheme climate report” and collect figures for the four compulsory metrics.
Pensions dashboards standards need ‘extensive user testing’
Respondents to the pensions dashboards standards consultation have warned that user testing and experience will be required before a full assessment can be provided.
“LGPS funds have open-ended time horizons, making climate change an ongoing challenge for funds while they generally retain higher allocations to growth assets,” said Philip Pearson, head of LGPS investment at Hymans Robertson.
“We are wary of making the content of the climate risk report mandatory, which runs the risk of group-think and funds not giving enough consideration to the specifics of their own assets/strategy,” he continued.
“While further guidance from the DLUHC will be welcome on this, we believe a non-mandatory reporting template may offer a more practical solution for funds.”
