Local Government Pension Scheme (LGPS) board advisors have welcomed the government’s consultation on climate risk reporting for funds but warned that the proposals will be “challenging” as resources are already stretched.
The Department for Levelling Up, Housing and Communities (DLUHC) is proposing that LGPS funds produce their first annual Climate Risk Report by December 2024. Administrating authorities will be expected to manage and report climate risks using four metrics covering absolute emissions, intensity of emissions, data quality and Paris Alignment.
LGPS funds will also be required to carry out two sets of scenario analysis, which involve an assessment of their investment and funding strategies. One scenario must be Paris-aligned and the other will be at the choice of the administering authority.
This consultation follows the government’s decision in November 2020 to make climate disclosures mandatory in the UK across the economy by 2025. The requirements are based on the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).
It also follows updated reporting requirements for private sector pension schemes that were put in place in 2021. The consultation highlighted that “the requirements for the LGPS should set as high a standard as for private schemes”.
It also noted that pension funds within the same LGPS pool should align their climate strategies and targets.
This is at a time when funds’ administrative resources are already stretched dealing with the McCloud remedy and getting ready for the pensions dashboard.
SAB’s response
The Scheme Advisory Board (SAB) said that it welcomed the publication of DLUHC’s consultation as it “recognises the significant role that the LGPS can, and indeed already is, playing in the transition to a low-carbon economy”.
But the board stressed that with many other demands on LGPS funds at present, the proposed new requirements will be “challenging”.
Joanne Donnelly, SAB secretary, told Room151: “This is at a time when funds’ administrative resources are already stretched dealing with the McCloud remedy and getting ready for the pensions dashboard.
“It is another substantial project for pensions committees, boards and officers to project manage and ensure delivery of.”
Donnelly highlighted that pension funds developing new skills and knowledge to produce the annual Climate Risk Report will also be a difficult task.
“There is also the challenge of getting the narrative right – so many people will be looking at these Climate Risk Reports and scrutinising every part of them.
“I hope those doing so recognise that we are all on a learning journey with these reports and it will take time to smooth off some of the rough edges and ensure the data is robust and credible,” she added.
LGPS funds have open-ended time horizons making climate change an ongoing challenge for funds whilst they generally retain higher allocations to growth assets.
A non-mandatory reporting template?
Philip Pearson, Hymans Robertson’s head of LGPS investment, said he welcomed the government’s consultation as it provides clear direction for funds to report on climate risks.
He said: “LGPS funds have open-ended time horizons making climate change an ongoing challenge for funds whilst they generally retain higher allocations to growth assets.
“This gives funds the ability to both influence outcomes and support the development of climate solutions.”
However, he added that a non-mandatory reporting template might have been more beneficial for funds.
“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 said.
Compiling climate risk reporting data will be even more tricky as there are valid concerns around data quality, clarity, and consistency.
Scheme Climate Report
The consultation also proposed that the SAB prepares an annual Scheme Climate Report, which will include a link to each individual administering authority’s annual report and aggregate figures for the four mandatory metrics.
The SAB already compiles a scheme-level report each year and a triennial valuation report for the LGPS. Donnelly said that publishing these reports presents challenges due to the different ways in which data is presented and calculated.
She said: “Compiling climate risk reporting data will be even more tricky as there are valid concerns around data quality, clarity, and consistency.
“The consultation suggests giving SAB the ability to design a template for funds to use in reporting their data, which could simplify things considerably from the board’s perspective, and hopefully for funds and pools too.”
The consultation closes on 24 November.
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