UK proposes extending TCFD reporting to local government pension funds
The advisory board for the Local Government Pension Scheme warned that requirements would be ‘challenging’.
The UK government has launched a consultation on new requirements for the Local Government Pension Scheme (LGPS) to manage and report on climate-related risks, in line with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).
The LGPS is a one of the largest pension schemes in the UK, with more than 6.1 million members working in local government or for other employers that participate in the programme. It is administered locally by 86 pension funds in England and Wales.
Under the new requirements, LGPS funds will be expected to manage and report climate risks using metrics covering absolute emissions, intensity of emissions, data quality and Paris Alignment. The UK government is proposing that funds produce their first annual Climate Risk Report by December 2024.
LGPS funds will also be required to carry out two sets of scenario analysis, which involve an assessment of their investment and funding strategies.
The consultation is based on TCFD recommendations and follows the UK government’s decision in November 2020 to make TCFD-aligned disclosures mandatory across the economy by 2025.
The LGPS Advisory Board (SAB) said that it welcomed the consultation as it “recognises the significant role that the LGPS can, and indeed already is, playing in the transition to a low-carbon economy”.
But the board, which seeks to encourage best practice and increase the transparency of standards issues, stressed that with many other demands on LGPS funds at present, the proposed new requirements will be “challenging”.
Joanne Donnelly, SAB secretary, told Net Zero Investor: “This is at a time when funds’ administrative resources are already stretched. It is another substantial project for pensions committees, boards and officers to project manage and ensure delivery of.”
Developing skills and knowledge
Donnelly highlighted that pension funds developing new skills and knowledge to produce the annual Climate Risk Report will also be a difficult task.
“There is also the challenge of getting the narrative right – so many people will be looking at these Climate Risk Reports and scrutinising every part of them.
“I hope those doing so recognise that we are all on a learning journey with these reports and it will take time to smooth off some of the rough edges and ensure the data is robust and credible,” she added.
Philip Pearson, head of LGPS investment at pensions consultancy Hymans Robertson, said he welcomed the UK government’s consultation as it provided clear direction for funds to report on climate risks.
He said: “LGPS funds have open-ended time horizons making climate change an ongoing challenge for funds whilst they generally retain higher allocations to growth assets.
“This gives funds the ability to both influence outcomes and support the development of climate solutions.”
However, he added that a non-mandatory reporting template might have been more beneficial for funds.
“We are wary of making the content of the Climate Risk Report mandatory, which runs the risk of group-think and funds not giving enough consideration to the specifics of their own assets/strategy,” he added.
The consultation closes on 24 November.