Timing and flexibility concerns raised over LGPS climate reporting

The first LGPS 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. 

A government consultation has run on the matter since September 1 and will close on November 24. 

The rules will apply to all LGPS authorities in England and Wales and will come into force by April 2023, covering a first reporting period of 2023-24.

We are concerned that scheme-wide reporting will result in league tables being drawn up and comparisons being made without appropriate context

Hymans Robertson

“The primary purpose of LGPS investments is to meet the scheme’s long-term pension liabilities by balancing risk and return appropriately,” the Department for Levelling Up, Housing and Communities 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.”

Respondents to the consultation have broadly expressed their support for improving LGPS funds’ climate reporting.

Some respondents have, however, asked for more explicit guidance on the proposals, while the Society of Pension Professionals has voiced concerns over the timing of the new requirements, which will ask funds to fulfil the proposals during the 2023-24 period.

“This will be challenging given the delay with guidance and the draft regulations which have not been published alongside the consultation,” the SPP said in its consultation response.

There should be flexibility on data metrics

Private schemes with assets of at least £1bn are in scope with the Department for Work and Pensions’ climate reporting requirements, which came into force in October 2021. 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.

Cardano Advisory director Ben Wilmot emphasised the need for the LGPS to understand the exposure of covenant to climate risk, arguing that much of the local authority schemes have higher exposure to climate risk given that they remain open to future accrual.

“For those administering authorities that rely on private entities for ongoing contributions, guidance regarding the assessment of funding strategies should mirror that given to occupational pension schemes, which trustees in the private sector have, in our experience, embraced,” he said.

A key difference in the rules between those governing LGPS funds and those that apply to private sector funds is the mandatory nature of the proposed requirement for authorities to report data quality as a metric.

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.

The LGPS Scheme Advisory Board said that it had considered whether the government should attempt to enforce greater consistency in the metrics that will be used to compile data.

“On balance and at this point in time, it leans more towards retaining flexibility in target setting, use of metrics and scenario analysis,” the SAB said in its response.

“This should be reviewed as best practice solidifies. It is important to emphasise that flexibility is key, as this is an ever-evolving area.”

Hymans Robertson, however, said that “mandating the adoption of certain metrics will enable comparisons to be drawn across the LGPS”.

“We are concerned that scheme-wide reporting will result in league tables being drawn up and comparisons being made without appropriate context,” it continued.

A challenging timeline

The first annual climate risk report for the 2023-24 period will have to be available by December 1 2024.

Respondents including the SAB sought clearer guidance from the government on a number of issues. The SAB has requested guidance on areas including how to gauge members’ support for prioritising climate targets and the extent to which the pursuit of targets “may justify investment choices that entail some element of financial detriment”.

“Government guidance would help clarify the application of the Law Commission’s advice in an LGPS context, where the primary fiduciary duty is owed to scheme members, but duties are also owed to scheme employers and local taxpayers,” it said.

It also advocated for a “pool first” approach, where LGPS pools would collect and analyse data “unless there was good reason not to”, which it said would help to standardise data collection and reporting.

The SPP agreed that public sector pensions have a role to play in the climate transition. 

However, in addition to its concerns about the timing of the new rules, it warned that the consultation was difficult to assess without guidance or draft regulations.

“In order to meet these timescales, the regulations will need to be at least finalised in advance of April 1 2023,” it said. 

“With no current draft in place, this seems challenging. Without regulation, any requests for data would be both uncertain and non-statutory in nature. 

“There is a danger that the data required will not be available in time.”