LPFA portfolio decarbonisation plan follows Net Zero Investment Framework.
A key London public-sector retirement scheme has committed to a 75% cut in carbon emissions over an 11-year period, using a template established by institutional investors to guide net zero strategies.
By the same date, it is aiming for 55% of the listed shares in its portfolio to qualify as aligning to net zero as a minimum, as defined by the Net Zero Investment Framework (NZIF).
These are two of the pledges in the climate action plan of the London Pension Fund Authority (LPFA), a scheme covering 130 employers and 93,000 members and with assets of £7.6 billion.
Originally set up to inherit the pension obligations of the Greater London Council (GLC), abolished in 1986, it has expanded to take in bodies including universities, charities and the GLC’s successor, the Greater London Authority.
“The baseline for our targets is 2019,” said Peter Ballard, Funding and Risk Director at the LPFA. “We wanted a defensible, science-based and serious way of doing it.”
The LPFA’s plan has been developed using the Paris Aligned Investment Initiative’s (PAII) Net Zero Investment Framework to which the LPFA signed up in September 2021. The PAII is a collaborative investor-led global forum, established by the Institutional Investors Group on Climate Change (IIGCC) to enabling investors to align their portfolios and activities to the goals of the Paris Agreement.
“Lack of available data”
The action plan comes as the campaign group Make My Money Matter, which pushes for pension funds to be invested in a responsible way, has published a survey showing that 60% of the UK’s top 20 defined contribution pension providers have not disclosed 2025 emissions reduction targets.
Despite being major shareholders of polluting companies, only ten providers have voting policies to require assets they own to reduce emissions in line with agreed climate goals.
The LPFA action plan lists six goals, the first three of which are related to portfolios. The first of these covers Scope 1 and 2 emissions from portfolio companies, with the target of a 75% reduction by 2030 compared with 2019.
The second is an additional target that the LPFA has set alongside those in the NZIF, and relates to the “implied temperature rise” from portfolio companies, with the objective of limiting such rises to well below 2°C by the end of the century, in line with the Paris Agreement.
The third refers to climate solutions, with a pledge to put money into those investments that will help to get to the net zero target by 2050. The LPFA said: “We have not set a goal for the percentage of assets to be invested in climate solutions at this stage because of the lack of available data.
“We expect to set a percentage goal for investment in climate solutions during 2023.”
Practising what it preaches
The next two goals focus on decarbonisation tactics. The first states: “We aim to ensure that by 2025 at least 32% (by value) of our listed equity investments in material sectors meet the criteria to be considered aligning to net zero (as a minimum) as defined by the NZIF.
“We aim for this proportion to rise to 55% by 2030. By 2040, we aim to ensure that all of our listed equities investments in material sectors meet the criteria to be considered aligned to net zero (as a minimum) as defined by the NZIF.”
Next is the “engagement goal”, under which as of now the LPFA will ensure that 70% of financed emissions in its portfolio are either net zero, on a path towards that end or are the subject of engagement or stewardship.
By 2030, 90% of emissions will meet those standards.
In the sixth goal, the operational goal, the LPFA practises what it preaches and seeks reductions in the carbon emission resulting from the running of the fund. Between 2022-2023 and 2030, these emissions will be cut by 50% per full-time employee.
“A collaborative effort”
Currently, the plan applies only to listed equities, which account for about half the portfolio, but Ballard said it would be extended across other assets. “We have not decided which ones yet,” he said. “We will decide over the next six months to a year.”
Ballard does not expect climate-related goals to conflict with the objective of making the proper returns for the fund. “Our primary goals will always be to pay pensions as they fall due,” he said, “but within that we believe there is plenty of scope to achieve net zero ambitions.”
Ballard added: “This is a collaborative effort. No one pension fund can achieve net zero by itself.”