LGPS Central launches new net zero strategy to ‘decarbonise real economy’
Patrick O'Hara and Edward Baker from LGPS Central talk to Net Zero Investor about the pensions pools newly launched net zero strategy.
LGPS Central, one of the eight Local Government Pension Scheme (LGPS) pools, has launched a new net zero strategy to help reduce its financed emissions and “decarbonise the real economy”.
The pensions pool, which manages £26.4bn and its collective partner fund assets stand at £56bn, has set a target to achieve net zero scope 1 and 2 carbon equivalent financed emissions by 2050 or sooner for listed equities, corporate bonds, sovereign debt and property.
LGPS Central also aims to achieve a 50% reduction in financed emissions by 2030 for listed equities and corporate bonds, with its current baseline financed emissions at 1,067,851 total CO2.
LGPS Central’s new net zero strategy is based on a twin-track target and implementation framework that includes: A series of emission-reduction and engagement targets from 2025 to 2050; carbon footprinting across all its public market and private market assets by 2026; and processes, practices, tools, and data for tracking progress and to decarbonise its assets.
Talking to Net Zero Investor, Patrick O’Hara, LGPS Central’s director of responsible investment and engagement, said: “This [the net zero strategy] isn't about us detoxifying our portfolio and just reducing the number of emissions associated with it.
“We're really interested in real-world emissions and the decarbonisation of the real economy. That's what's required by the Paris agreement and that’s what has been committed to by governments and companies.
“As responsible owners of the companies we invest in, that is our role, we are not just speculators in their share price we are stewards of those companies.”
‘Realistic but challenging’ climate targets
LGPS Central’s net zero strategy is largely focused on engagement with its portfolio companies on their climate targets, which should be “realistic but challenging”. This is done either directly or indirectly through its external managers.
O’Hara explained that LGPS Central has been engaging with companies on climate change for some time, but the new strategy has put a “renewed focus on net zero” as part of this stewardship.
Currently, 96% of LGPS Central’s financed emissions are generated by 59% of its portfolio companies. O’Hara added that the pool is in the process of identifying the companies that are “key” to achieving its net zero targets.
He stated that engagement with these companies will consist of them reporting their emissions accurately against LGPS Central’s five-year interval targets for financed emissions set out in its net zero strategy. In addition, the engagement will involve assessing companies’ net zero targets, which cover Scope 1, 2 and 3 emissions.
In regard to its indirect engagement with companies through external managers, O’Hara stated that it will be monitoring the performance of managers when trying to influence organisations’ net zero behaviour.
“So, it's soft pressure that will be exerted through those honest conversations that we'll be having with them [managers] if companies underperform on net zero targets.
“A recent example of this was within one of the sustainable funds as one of our managers decided to sell a stock following dialogue that we've had with them about the business model of the company, but it is ultimately the managers decision,” he added.
Political impact on transition
The launch of LGPS Central’s net zero strategy comes on the back of the UK government’s recent U-turn on its climate policy.
Edward Baker, LGPS Central’s net zero manager, highlighted that we are currently in “unsettling times” and “clearly” these policy changes will have an overall impact on the world’s net zero transition.
However, he stated that: “The transition to net zero emissions is motivated not only by policy but also by factors like companies' production plans and industry competition, and this motivation remains unaffected by short-term political changes”.
Both O’Hara and Baker highlighted that LGPS Central remains totally committed to its 2050 net zero target despite the government’s rollback.
O’Hara said: “All of our active mandates are managed with an expectation that the manager will do a robust job of integrating environmental, social and governance (ESG) considerations into their investment processes.
“So, we do expect them to be picking up climate related opportunities and market trends. That equally means analysing the downside risks associated with the transition to a low carbon economy.
“ESG integration for us is not just about analysing the downside risks associated with the climate transition. It is also about identifying opportunities, for example companies within a sector that are showing leadership in areas that are going to benefit from the transition, and underweighting those sectors and those companies that are going to be threatened by it.”
“As the signals around the transition become stronger and government policy progresses and market trends become clearer, we expect our portfolios and their associated benchmarks to naturally tilt towards companies that are better aligned to net zero and the transition.”
In-house climate solutions?
When asked whether LGPS Central would be launching any in-house climate solution strategies on the back of their net zero strategy, O’Hara stated that the pension pool is currently “exploring” potential offerings for its partner funds.
He added that it is in the process of reviewing how its existing climate multi factor fund index could meet the pool's net zero ambitions.