The UK’s Local Government Pension Scheme (LGPS) sector faces several hurdles to implementing the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), according to one scheme manager.
Tim Mpofu, manager of the £1bn (€1.1bn) pension fund for the London Borough of Hammersmith & Fulham, said data was the biggest challenge facing LGPS funds as they work to comply with new government requirements.
Speaking at the Pension and Lifetime Savings Association’s LGPS virtual conference yesterday (12 November), he said there was a “considerable amount of work” needed before reporting on the impacts of climate change on investment portfolios could be properly standardised.
“We are living in this golden age of data and information, but it still seems like we are some way from having any form of standardised reporting on ESG,” Mpofu said.
Earlier this week, UK chancellor Rishi Sunak said the government planned to introduce fully mandatory climate-related financial disclosure requirements across the economy by 2025.
The Ministry for Housing, Communities and Local Government – which oversees the LGPS – intends to consult next year on climate-related financial disclosures by local authority schemes, with the intention of them coming into force by 2023.
“I’m quite excited and encouraged the chancellor’s statement earlier this week”
Tim Mpofu, manager of the Hammersmith & Fulham pension fund
“I’m quite excited and encouraged the chancellor’s statement earlier this week,” Mpofu said. “His ambition to be able to have the TCFD [standards] mandatory by 2025 is a step in the right direction.
“But taking a step back, in my view there is still a considerable amount of work required to be done before reporting on climate risk is standardised.”
He cited the differences between proprietary ESG rating models used by different asset managers, which made it harder to compare investment offerings.
The pension fund manager also highlighted that, as data quality developed, models would need to be revised – which could lead to negative consequences for investors seeking to lower the carbon footprint of their portfolios.
Scope 3 data questions
The Hammersmith & Fulham pension fund has targeted a carbon neutral investment portfolio by 2030, and while it has made progress towards this goal Mpofu said it could be set back as scope 3 emissions data improves.
Scope 3 refers to indirect emissions that occur within a company’s supply chain, besides those from purchased electricity, heat or steam, which are Scope 2 emissions. Scope 1 covers a company’s direct emissions, from owned or controlled sources.
Valeria Dinershteyn, senior sustainable investment strategist at Northern Trust Asset Management, said that while scope 1 and 2 emissions data was generally of a high quality, scope 3 data was far less reliable.
She said she hoped that asset managers would be able to incorporate more of this data as it improved over the coming years, including addressing the issue of double counting emissions, as one company’s scope 3 data could be another’s scope 1 or 2.
In the meantime, Mpofu said investors had to be aware that new data could lead to fundamental changes in assets or funds that were previously thought to be low-carbon investments, potentially throwing them “off track” from their climate goals.
He said: “If at any point between now and 2025 [scope 3 emissions] get included as part of reporting, then [portfolio emissions] are going to spike, because a lot of the low carbon funds have investments in tech stocks, which have a lot of their economic activity in that scope 3 level.
“Once more TCFD data becomes available, what does that mean for low-carbon indices? Is that index still low carbon if you include scope 3 emissions?”