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Session ID: 2022-03-11:54c8618b1429229616728ead Player Element ID: video4108f453fe1043c89acdd6685456dd4c
The UK government wants pension schemes to assess and report on the financial risks of climate change in their investment and funding strategies. Large corporate schemes will soon be subject to regulations based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), an international framework set up to promote better disclosure of climate-related risks and more informed investment decisions.
We expect that in the near future the Ministry of Housing, Communities and Local Government (MHCLG) will require the Local Government Pension Scheme (LGPS) to implement similar measures to those required of corporate schemes by the Department for Work and Pensions (DWP).
Mercer held a webinar with a panel of experts discussing the issues and answering questions about what the changes mean and the steps you should be taking to prepare.
There was a great turnout with 105 attendees representing 57 LGPS Funds. About 85% of participants were Fund officers with councillors/committee or board members making up 10% and independent advisers making up 5%.
We took the opportunity to ask attendees three questions to gauge how ready the LGPS is for TCFD reporting and what shape attendees expect the changes will take. The results were largely reassuring but also confirmed there is lots of work to do.
How well prepared do you feel to manage the TCFD reporting requirements?
MHCLG is due to issue a consultation on TCFD over the summer and we expect the recommendations to be broadly in line with the DWP’s measures. The steer from central government is that the LGPS will be required to comply by 2023 but there are benefits to do so earlier.
If you’ve been wondering how much progress other Funds have made, this poll should be reasonably comforting. Only 2% of respondents thought they were fully prepared and 30% had done little or nothing to get ready. Of course, Funds that didn’t take part in the webinar may be disproportionately unprepared.
Almost 70% were somewhere in the middle. Therefore if you have only taken limited action you are not alone. Even if you are one of the unprepared 30% you can catch up but time is of the essence. Funds will be encouraged to comply as soon as possible and we are talking to those that are already reporting or looking to do so in the next year or so.
Whatever stage you believe you are at, do take a look at Mercer’s TCFD reporting checklist, which will give you a broad understanding of what will be required.
To what extent do you think MHCLG should prescribe TCFD reporting metrics for the LGPS?
About three-quarters of respondents want a mix of prescription and flexibility. The MHCLG does not want to dictate to funds, preferring instead to produce broad regulations with some consistency in metrics but with scope for funds to adapt based on their individual approach and circumstances.
We support this approach because individual Funds have varying goals and are at different stages in thinking about responsible investment and climate change. We also recognise the benefits of having some degree of consistency across LGPS.
If you are among the 24% expecting the government to dictate metrics you probably have more work in store than you think. Everyone will have plenty to do to ensure their reporting is robust within the flexible framework.
To what extent will you be looking to your Pool to support you to deliver your TCFD reporting?
Our poll shows the vast majority (74%) of Funds expect their Pool to do most of the work when it comes to TCFD analytics, leaving them to address and report on TCFD according to their own strategy. This is a sensible approach but some Funds may need extra advice and help to comply with the MHCLG’s requirements - and the 13% that expect the Pool to do nearly all the work will probably need to reconsider their approach.
As our checklist shows, a lot of the recommendations concern governance arrangements, including how the pension committee considers climate-change related matters, and how the Fund monitors climate change and assigns responsibility to officers and committees. Funds may want to assess their governance and consider a formal review. Some Funds are proactively doing this and we are talking to others about reviewing their arrangements.
Where are we now?
Most Funds have made a start to their preparations for TCFD and have realistic expectations about the work involved. However, a sizeable proportion need to move apace and adjust their thinking. Even those Funds that have begun to prepare need to act with urgency because of the amount of work involved and the pressure to comply will intensify with the government increasingly focused on climate change.
Ultimately TCFD reporting is more than a compliance issue – climate change will have a material financial impact on LGPS, as it will for all investors. For example, certain companies within the energy sector might be vulnerable to disruption from a transition to a low carbon economy.
Understanding and responding to climate change risk is about making better investment decisions for the benefit of your members. Mercer has been working with investors to address climate-related risks and opportunities for over a decade. Please contact us if you would like to find out more.
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