Interim targets and twin track strategy across asset classes designed to combine pragmatism with “precision and transparency”.
LGPS Central has stressed that its new Net Zero Strategy for long-term emissions reductions will not be derailed by the UK government’s recent watering down of climate policy.
The UK local government pension pool’s strategy, which has been in development for 14 months, builds on its early 2022 commitment to achieve net zero Scope 1 and 2 carbon equivalent (CO2e) financed emissions by 2050 or sooner for listed equities, corporate bonds, sovereign debt, and property.
This includes a 50% reduction of Scope 1 and 2 CO2e financed emissions by 2030 for listed equities and corporate bonds.
Patrick O’Hara, Director of Responsible Investment at LGPS Central, told ESG Investor that the strategy aims to “formalise and add precision” to the organisation’s ESG integration and stewardship efforts.
It is also aims to be transparent about targets and progress, while offering LGPS Central’s eight county-level partner funds a mechanism for “measuring success”, he added.
O’Hara added that while recent policy announcements made by the government “aren’t particularly helpful” in accelerating the transition they will not “derail it” and have limited implications for long-term targets.
Societal priorities and stewardship
In September, UK Prime Minister Rishi Sunak confirmed that a ban on buying petrol and diesel cars would be delayed to 2035 from the original 2030 deadline set by previous PM Boris Johnson.
Investors expressed concern about the “lack of certainty” the decision created, as well as the knock-on effects it could have on the country’s net zero transition.
Last week, industry experts speaking at Morningstar’s ‘Sustainable Investing Summit 2023’ warned that the climate policy response by governments and investment in clean technologies must be accelerated to keep temperature rise near 1.5°C.
“We think that our strategy is aligned with societal priorities and it’s realistic and consistent with a just transition.” O’Hara said. “We never thought that this was going to be a linear journey or that we were going to achieve some percent reduction every year.
“There would be peaks and troughs both in the emissions charts but also in terms of policy support and political will,” he added.
O’Hara highlighted that there are “a lot of other actors” other than the government, including cities, local authorities, corporations that are also working towards net zero.
“Market forces are also in play here and we think [they’ll] make the biggest contribution to this,” he added. “Climate change isn’t going to go away because we’ve got a general election in this country.
O’Hara underscored that engagement and stewardship is “very important” in shifting business models to more sustainable models that are “fit for purpose in a low carbon world”.
LGPS Central said that stewardship is a “core pillar” in its net zero strategy and is “crucial” for achieving the objective of decarbonising its pooled assets in a “manner that contributes to the reduction of global emissions”.
O’Hara noted that there is a “great variation” in stewardship even between asset managers that “purport to be integrating ESG and committed to responsible investing”.
“There’s also great variation in terms of how the ESG teams engage, and how much involvement there is in that within the investment teams,” he added.
Interim targets, twin tracks
LGPS Central’s strategy introduces interim portfolio carbon footprint reduction targets between the 50% 2030 reduction and 2050 Net Zero Scope 1 and 2 CO2e financed emissions achievement for combined listed equity and corporate bond portfolios. These targets are 60% in 2035, 80% in 2040, and 90% in 2045.
“Rather than having a 2050 target just saying net zero we wanted to break that down into bite-sized interim targets that will allow as much transparency in terms of progress,” O’Hara said.
LGPS Central underscored that it does not plan to purchase carbon credits to offset its financed emissions. It also stressed that it wanted to have “realistic but challenging” targets post-2030.
Edward Baker, Net Zero Manager at LGPS Central, said that the strategy demonstrates the organisation is “serious about following through” on its net zero commitment, as well as having a “well thought through” and “technically rigorous” approach for its delivery.
“We want to continue to invest in the economy and minimise the disruptions that climate change is going to cause,” Baker said. “It’s not just about being nice people, it’s also about hard-nosed commercial reality as well.”
To develop the strategy LGPS Central looked at “broad commitments” and strategies published by asset owners and managers to “identify best practice and an approach that would work for us”, O’Hara added.
The strategy has five phases of implementation for both asset-class groups. The first four phases are comprised of data and metrics, carbon footprints, carbon-reduction targets, and monitoring and engagement.
The final phase will be a review of the strategy in 2026 to evaluate its effectiveness.
The strategy has used a twin track approach, which O’Hara says recognises that asset classes will “progress at different speeds”.
He noted that private markets are on a “different trajectory” to listed markets in terms of data and reporting on climate. He also said that the organisation has “less experience” of conducting carbon analysis of sovereign and private market investments due to data and other challenges around how to analyse and engage with issuers and investee companies.
“We didn’t want private markets to be left behind nor did we want it to hold us back,” he said, adding that there are “quite a few philosophical challenges” with engagement and setting targets for sovereigns.