Public sector pension schemes expected to need further support from managers and pools to meet proposals for TCFD-based reporting.
New proposed climate reporting rules for UK public sector pension funds will level the playing field between public and private schemes and are expected to accelerate action by investors and corporates against climate-related financial risks.
A consultation, published by the UK Department for Levelling Up, Housing and Communities (DLUHC), outlines new requirements for Local Government Pension Scheme (LGPS) administering authorities (AAs) to manage and report on risks in alignment with the Taskforce on Climate-related Financial Disclosures (TCFD) framework.
“These new reporting rules will address the existing climate-focused disparity between public and private pension funds, and will ultimately create greater impetus for their external asset managers and portfolio companies to take action to address climate change,” Simon Jones, Head of Responsible Investment at Hymans Robertson, told ESG Investor.
UK-based private pensions with assets over £5 billion are already subject to mandatory TCFD-aligned reporting rules, which will be extended to cover schemes with at least £1 billion in assets from October.
The LGPS is a public service pension scheme for people working for local governments and other employers across England and Wales, and is administered locally by 86 local pension funds grouped into eight pools, which manage the majority of the authorities’ assets.
“The government’s view is that the requirements for the LGPS should set as high a standard as for private schemes,” the DLUHC said in its consultation, noting that all LGPS funds will be subject to these rules – regardless of size.
TCFD a “starting point”
As well as fulfilling the TCFD reporting guidelines, which DLUHC described as “starting point” for public schemes, LGPS AAs will also be expected to report on metrics covering absolute emissions, data quality and emissions intensity, setting a non-binding target in relation to one of these metrics. The authority will then be required to report on progress against this non-binding target annually.
“It is going to be challenging to overcome these new resource commitments, and trustees will need to go through an educational process to bring themselves up to speed,” Jones acknowledged.
Jacqueline Jackson, Head of Responsible Investment at London CIV, an LGPS pool which manages £48 billion on behalf of client funds, said targets for and governance of AA’s climate risks would need to evolve over time, partly because as proposed targets do not focus directly on achieving net zero.
She added that AAs may chose to go beyond current reporting needs, by reporting on individual funds. “This would give the AA a clearer picture of where its carbon exposures lie and facilitate an easier route towards driving real-world outcomes which of course, is the ultimate goal of increased disclosure requirements,” she said.
While the DLUHC recognised that larger LGPS funds will have more capacity to meet these reporting requirements than smaller funds, it said that “it would not be right to stage implementation within a single pension scheme in which all funds face climate risks, are democratically accountable, and subject to high external scrutiny”.
Given the pooled nature of LGPS funds, Jones said that entities will be aggregating responsibility which should help to facilitate decision-making and reporting. “Data can be collected on behalf of multiple clients,” he said.
While the new requirements are likely to stretch the expertise and resources of smaller funds, LGPSs are offering increased support on managing climate risks, according to London CIV’s Jackson. This includes calculating and reporting climate risk for clients’ ‘off-pooled’ funds in line with TCFD, for a range of asset classes.
“This enables us to save clients money and report across the board in a uniform manner, meaning that our clients’ climate risk is easily comparable, measurable from fund to fund and across the pool as a whole.”
Both asset managers and LGPS pools will need to provide further support in the longer term, Jackson added, as AAs build capacity and understanding throughout their in-house teams over time.
“Managers could be helping to provide calculations on a fund-by-fund basis and explaining findings to AAs due to better capacity and resource. They should also be helping AAs to navigate the data whilst they develop more in-house capability and gradually streamline reporting.”
In parallel, LPGS pools can provide assistance by consolidating relevant data for greater consistency and comparability, she added. “At London CIV, we help make data comparable fund-by-fund and maintain it in one centralised place, where we are able to respond to questions from clients and make comparisons to support investment decisions and strategy.”
The DLUHC consultation, which was published on 1 September, will close on 24 November. The regulations will then apply to all LGPS AAs from April 2023 with the first annual reports expected December 2024.
“It’s important that LGPS funds then consider what is within their sphere of influence, and how they can use the information disclosed in their reports to drive positive change from their external managers and portfolio companies,” said Jones.