Like many asset owners, one of the biggest challenges for U.K. local government pension schemes and their investment pools is how to address ESG issues, starting with the transition to a low-carbon economy.
Many of the LGPS pools have committed to net-zero greenhouse gas emissions in their portfolios by 2050, and some have set daunting deadlines as early as 2030. London LGPS CIV Ltd. chose 2040 to send "a clear signal to all our clients, managers and investee companies about urgently addressing this increasingly material issue," according to its April 2022 policy.
More movement is expected this year, as local pension funds and their pools prepare for new climate-related reporting requirements from the U.K. government. The government has already rolled out new reporting rules on climate risk and opportunities for large corporate pension funds, based on the principles of the Task Force on Climate-related Financial Disclosures. In October, the threshold will be expanded from pension funds with assets of £5 billion ($6.2 billion) to those with £1 billion or more. Local government pension schemes — already required to report on environmental, social and governance factors that could be financially material to investment performance — expect to be next.
The LGPS pool system allows local pension funds that are at various stages of their net-zero journey to pick their pace and approach.
A new global multifactor passive equity fund with a climate focus managed in-house by LGPS Central Ltd., Wolverhampton, was launched with initial allocations from two partner pension funds. The FTSE customized index tilts the fund away from companies with greater carbon emissions and the most carbon-intensive fossil fuel reserves toward those with green revenues. With partner funds having different approaches to ESG, LGPS Central worked with them to determine the mandates for the three subfunds of the global sustainable equities active fund, to fit their respective risk budgets, said Mark Davies, investment director for active equities. LGPS Central has £49 billion in combined assets.
At London CIV, managing £27.9 billion for 32 client funds in London, "the overarching thing is ESG, and particularly net-zero," said CIO Jason Fletcher. The pool offers LGPS fund clients what he calls "a temperature gauge," partnering with S&P Global Trucost to "effectively test the temperature of their portfolios," Mr. Fletcher said. "We have got to make sure we deliver what we say on the tin," particularly before TCFD reporting requirements could kick in, he said.