Government ponders TCFD mandate for Local Government Pension Scheme

The UK Government is consulting on whether to introduce plans that would require Local Government Pension Scheme (LGPS) administering authorities to manage and report on climate-related risks in alignment with recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

Government ponders TCFD mandate for Local Government Pension Scheme

Under the proposals, administering authorities would be required to calculate and act on the carbon footprints of their assets and funds

The new consultation was launched this week by the Department for Levelling Up, Housing & Communities (DLUHC) and will examine whether LGPS should improve climate-related reporting.

Administering authorities for the LGPS already have to factor ESG into the performance of their investments, but the Government is looking to strengthen this approach further by aligning it with the TCFD.

Under the proposals, administering authorities would be required to calculate and act on the carbon footprints of their assets and funds and examine what risks could emerge across various heating pathways, including the 2C and 1.5C ambitions of the Paris Agreement.

The government also stated that requirements for the LGPS should be equal to the high standards facing the private sector.

As of April 2022, certain large businesses in the UK are required by law to include climate risks in their annual reporting, through a TCFD-aligned mandate.

The aim of the mandate is to increase climate-related engagement between investors and the companies they invest in. Until now, non-unified climate disclosures have made it challenging for investors to truly measure their exposure to climate risk. Another benefit is that, in measuring their climate impact, risks and opportunities, businesses may well be compelled to increase their environmental ambitions and accelerate actions. For businesses, this may come with operational cost savings and cost savings in terms of avoided risks.

Here’s everything you need to know about the UK’s TCFD mandate.

Commenting on the Local Government Pension Scheme (England and Wales) Consultation: ‘Governance and reporting of climate change risks’, Philip Pearson, Head of LGPS Investment said: “This provides clear direction for Funds on the steps they will need to take to further develop their approach to addressing and reporting on climate change risks. The timescales are sensible, with the first reports due by December 2024, although we expect that a number of Funds will be in a position to report ahead of this deadline given the work that has already been undertaken to address climate issues.  Governance also plays an important role in the proposals with emphasis being placed on assessing and managing climate-related risks and opportunities.

“This makes the consideration of climate risk much more than a reporting exercise; Funds will need to ensure that all parties involved in the management of investments are properly addressing climate risk. The proposals will create consistency across the whole of the pensions industry and we believe it right that these requirements are at least as high as in the private sector. 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.  Finally, we believe it appropriate that the requirements should apply to all LGPS Funds, regardless of size, creating the opportunity for combined reporting.  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.  Whilst further guidance from DLUHC will be welcome on this, we believe a non-mandatory reporting template may offer a more practical solution for Funds.”

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