Climate risk consultation launched for pension scheme

The UK's Local Government Pension Scheme (LGPS) could soon face new requirements to manage and report on climate-related risks after a consultation was launched.

The consultation proposes more effective climate risk governance, strategy, management and targets for the LGPS, which has more than six million members and manages over £300bn of assets.

This includes a requirement for authorities to calculate the carbon footprint of their investments, and to assess how different temperature rises could affect assets and liabilities.

They would also need to report annually on how their assets are aligned with the Paris agreement. The move seeks to bring the LGPS in line with the Task Force on Climate-Related Financial Disclosures (TCFD) requirements, which are already in place for private pension schemes.

Minister for levelling up, Paul Scully, said: “The UK is a world leader in implementing the recommendations of the TCFD, which are a key factor in greening the financial sector.

“I am pleased that we are proposing to extend these requirements to the LGPS, which has assets in excess of £300bn and enormous potential to have a positive climate impact.”

The government stressed that the proposed requirements do not encourage funds to divest from energy companies, which will be key to the transition to clean energy in the UK.

The first annual reports on alignment with the Paris Agreement are due by December 2024 – subject to the consultation – although it is expected that a number of funds will be in a position to report ahead of this deadline.

Philip Pearson, head of LGPS investment at Hymans Robertson, welcomed the proposals, saying that they will create consistency across the whole of the pensions industry.

“LGPS funds have open-ended time horizons, making climate change an ongoing challenge for funds whilst they generally retain higher allocations to growth assets,” he continued. “This gives funds the ability to both influence outcomes, and support the development of climate solutions.

“We believe it appropriate that the requirements should apply to all LGPS funds, regardless of size, creating the opportunity for combined reporting.

However, he added: “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.

“We believe a non-mandatory reporting template may offer a more practical solution for funds.”

The consultation closes on 24 November 2022