Exclusive: Nearly a third of LGPS unprepared for TCFD requirements

Local Government Pension Scheme (LGPS) trustees have been urged to proactively prepare for the expected Taskforce for Climate-related Financial Disclosure (TCFD) reporting requirements, after research from Mercer revealed that 30 per cent were “not at all” prepared for the changes.

The findings from the firm’s webinar poll showed that 44 per cent felt somewhat prepared, whilst 24 per cent were becoming prepared, and just 2 per cent were fully prepared.

The government previously suggested that it would extend the regulations, which apply to larger pension schemes from October, to the LGPS, recently confirming that it was getting "close to the point" of consulting on this.

Indeed, Mercer head of LGPS investments, Kieran Harkin, emphasised that there is a “very clear steer” from the Ministry of Housing, Communities and Local Government (MHCLG) that reporting for the LGPS is coming, and is “highly likely” to be mandatory from 2023.

“Although there’s a good possibility that from next year onwards there will be an expectation that LGPS funds may well need to start reporting to make sure they are in line with the particular requirements,” he added.

Harkin also highlighted the timings as “realistic”, stressing that there is a reasonable amount of time to be able to prepare prior to 2023, although it’s “clearly not something that should be left until next year”.

“We would urge action now,” he continued. “All funds, irrespective of size, should seriously consider doing certain things on the journey now.

"Clearly moving straight to full TCFD compliant reporting is not an easy step, but there are gradual steps that can be taken straight away.”

Adding to this, Mercer investment consultant, Hill Gaston, predicted that there will be “broadly similar regulations”, with the LGPS now looking to the DWP regulations to see what is likely to come their way.

He continued: “There is every indication this regulation is coming. Climate change is a financially material risk and there are advantages to early reporting.

“More broadly, we think we’re in danger of sleepwalking towards a systemic market failure caused by climate change.

“The reason we have TCFD reporting is so we can identify, manage and correctly price the risks from climate change. It’s a bit like being a frog in a saucepan, if you don’t pay attention early enough it might be too late.”

He also stressed that TCFD reporting is a “very useful framework” for managing risks amid the transition to a low carbon economy, warning that the policy implications of this are “vast”.

“The investment implications are such that if you’re investing for a ‘business as usual’ scenario you are running some very, very serious risks,” he stated. “We can’t afford to ignore climate change.”

Indeed, Gaston noted that according to Mercer’s ‘Investing in a Time of Climate Change, the Sequel’ scenario analysis, energy and utility sectors are going to be "severely impacted" by 2030 in a 2-degree scenario.

Furthermore, according to the model, coal is going to lose 59 per cent of its value by 2030 under a 2-degree scenario, oil and gas 42 per cent loss, and electric utilities 39 per cent, whereas renewables are expected generate over 100 per cent return under this timeframe and scenario.

“So there are big risks and there are big opportunities, and the markets won’t wait for arbitrary regulatory deadlines before they re-price,” Gaston stressed.

And whilst the final details of the requirements for the LGPS are not yet known, Gaston has predicted that the guidance will include a steer on which metrics funds are expected to focus on, but with some flexibility, to allow for comparison, whilst also taking account of different circumstances.

Mercer’s poll also revealed that around a quarter (24 per cent) of LGPS trustees thought that the MHCLG should 100 per cent centrally prescribe the TCFD reporting metrics to allow for comparison, while 64 per cent expected them to broadly prescribe, with some flexibility.

A further 12 per cent expected the MHCLG to be broadly flexible, with some prescription, whilst none of the respondents expected their to be almost entirely flexible interpretation.

In addition to this, Harkin noted that the LGPS is expected to report across the scheme in aggregate, arguing that this will allow for good participation of all the stakeholders.

"There is clearly a sharing of information you can have in terms of common mandates, and there are pools and it is important how they also assist in data provision," he continued.

"So, there’s a whole ecosystem around the LGPS, which is very good when it works together, and we think this is an area that will certainly be assisted by that."

According to the survey, around 13 per cent of respondents expected their pool to lead on data and all reporting requirements, whilst an equal proportion expected some input from the pool, but for the fund to lead.

The majority (74 per cent), however, expected input from their pool on all analytics, to enable the fund to then report in its own way.

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