Yesterday (1st September 2022) the UK government commenced a consultation on obliging trustees of the £342bn Local Government Pension Scheme (LGPS) in England and Wales to report and address climate risks in the assets they manage. The consultation document is here.
This continues the climate focus commenced in 2021 across the UK for larger private sector occupational pension scheme trustees. The resulting Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (and similar in Northern Ireland) are in your systems (in ENV Energy), and there is an Audit Checklist question also. October will add an amendment to the Regulations in Britain. The statutory guidance for these obligations is here.
[you will note that certain larger UK private companies also have climate reporting obligations, which were enhanced this year, these instruments are in your Registers, as are the Audit Checklist questions]
After the phasing-in, in respect of the private (Occupational Pension) funds, the climate focus will extend to trustees of money purchase and non-money purchase schemes with £1bn or more in “relevant assets”. It will also include trustees of all authorised master trusts and authorised schemes (once established) providing collective money purchase benefits, in both the accumulation and decumulation phases. You are advised to re-check if the climate focus applies to the pension scheme in your organisation.
The (Occupational Pension) statutory guidance states – “To meet the requirements imposed by the Climate Change Governance and Reporting Regulations 2021, trustees should have a good understanding of the climate-related risks and opportunities that are relevant to their scheme. Trustees should understand that as a systemic risk, climate change risk could include risks outside of the obvious sectors, including those which are both directly and indirectly affected.”
And “Trustees have a legal duty to consider matters which are financially material to their investment decision-making. Trustees must not only consider the kinds of financial risks which might affect investments (and in the case of DB schemes, their liabilities and sponsoring employers’ covenant), they should consider where climate change, and action to address climate change, might contribute positively to anticipated returns or to reduced risk.”
And “Climate-related risk and opportunity is one of the major categories of financial factors of which trustees need to take account. Trustees also need to take account of other risks affecting the pension scheme, in line with their fiduciary duty. As such, trustees are expected to take a proportionate approach to managing climate-related risks and opportunities. The time spent by trustees on considering climate-related risks and opportunities, should not come at the expense of considering other major risks, including financially material social and governance factors.”
The government proposal for the LGPS scheme takes as it’s starting point the above Occupational Pension trustee obligations, but hints at extending it with more specificity on fund investment.
For example, the consultation document points to the UK Energy Security Strategy published in April 2022 (which highlighted energy investment opportunities for the private sector to improve energy security and support the transition to clean energy). The consultation document states the LGPS has an important role to play as a major investor with a commitment to stewardship and engagement.
The consultation document states “These proposals seek to support that approach to addressing high carbon emissions and discourage any pursuit of lower emissions through withdrawing investment from energy companies.”
Another difference with the private sector scheme is the proposed requirements will apply to all LGPS AAs (fund managers) from 2023/24 regardless of fund size. Currently the assets held by LGPS funds range from around £0.5 billion to £25 billion with 65 funds holding less than £5 billion and 8 funds holding less than £1 billion.
It is also proposed that data quality is a mandatory metric (for reporting). The consultation states this is in order to help the LGPS use its scale and market power to drive improvements in the quality of emissions data, which will be a critical factor in raising the quality of climate risk management.
Statutory guidance will be produced. Consultation closes on 24th November 2022.