Offsets, lobbying to feature in targeted corporate engagement through CA100+.
Close engagement with asset managers will be a core 2022 priority for UK-based LGPS Central, which manages £49 billion for eight Midlands local government pension schemes, following its net zero commitment, announced last week.
“We will be having conversations with our asset managers about how our net zero commitments will need to be incorporated into their engagements and reporting,” Patrick O’Hara, Director of Responsible Investment and Engagement at LGPS Central, told ESG Investor. “They will be closely scrutinised and challenged on their engagements if they aren’t aligned.”
Transparency from asset managers is a key component to ensuring investee companies are transitioning to sustainable products and practices, O’Hara noted.
Although LGPS Central retains voting powers associated with shareholdings, the asset owner still considers all voting history on ESG-related issues as part of its due diligence when selecting managers.
“We discuss voting intentions with them, sharing insights beforehand so we can gauge the extent to which we are aligned on key issues,” he added.
LGPS Central has pledged to achieve net zero emissions across its internally and externally managed portfolios by 2050 or sooner, across listed equities, corporate bonds, sovereign bonds and real estate. LGPS Central has further committed to halving emissions across its equity and fixed income portfolios by 2030.
LGPS Central’s approach will be informed by the Institutional Investor Group of Climate Change’s (IIGCC) Net Zero Investment Framework.
Due to the challenges identifying and measuring all emissions across other asset classes, O’Hara said LGPS Central’s net zero commitments will be extended to other asset classes when reliable data becomes available.
Engaging through CA100+
LGPS Central will continue to directly engage with companies across its owned and managed portfolios through the Climate Action 100+ initiative (CA100+).
Working collaboratively with other CA100+ investor members, LGPS Central has engaged with companies about implementing climate transition plans, setting short-term decarbonisation targets, demonstrating a longer-term ambition to include Scope 3 emissions and ensuring transparency of their climate lobbying activities.
On lobbying, LGPS Central “recognise[s] that’s one of the biggest ways companies can influence the speed at which decarbonisation happens – positively or negatively”, O’Hara noted.
Companies’ use of carbon offsets will feature more heavily in LGPS Central-led engagement efforts, he added. “We want to make sure companies have first explored every other avenue of reducing their emissions and that the offsetting they do carry is legitimate, transparent and capturing carbon permanently.”
This week, CA100+ published its 2021 progress update, highlighting both a growth in investor members and companies targeted through engagement.
Of the 167 focus companies, which are responsible for 80% of global industrial emissions, 52% have now set credible net zero commitments, the update noted, adding that 72% are also reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) guidelines.
UK pension schemes with over £5 billion in assets under management have been required to provide TCFD-aligned annual reports since 1 October, 2021.
“By engaging with their portfolio companies and using their pension power to make them change, LGPS Central is setting an example for how the local government pension sector can make the transition to net zero,” said Huw Davies, Senior Finance Adviser at campaign group Make My Money Matter. It previously warned that three quarters of the UK’s largest pension schemes are failing to make robust net zero commitments.
LGPS Central has spent the past few months “getting comfortable” with committing its portfolios to net zero, O’Hara said, in preparation for “implementing these commitments with external managers and developing appropriate reporting mechanisms to track progress towards interim targets outlined by the IIGCC in their framework”.