LGPS webinar: Governance the key to TCFD implementation

Room151’s climate risk panel, Winter 2021

LGPS funds have been warned that governance is at the heart of Whitehall plans to impose a new climate reporting regime on pension funds.

In January the Department for Work and Pensions launched a consultation on the introduction of a new reporting framework from the G20’s Taskforce for Climate-related Financial Disclosures (TCFD).

Speaking at Room151’s Wnter 2021 LGPS webinar, Carolyn Saunders, a pensions expert at law firm Pinsent Masons, though the consultation looks like a reporting issue it is governance that will underlying factors will be the quality of governance underlying the new disclosures scheme.

“Don’t think that TCFD compliance, when it comes to the LGPS is just about reporting. It is about reporting, but actually, at its heart, it’s about governance.

“And every scheme going is going to need to up its governance game, just in order to deal effectively with climate risk and opportunity, but also to deal with repetitional risk.”

The DWP’s current consultation is aimed at private sector pension schemes. Measures for the LGPS are expected later this year.

But Saunders stressed that trustees would need to know the detail of their schemes climate policy and how it reaches through and is monitored in the investment chain.

“There’s a sense in the private sector that trustees will be expected to have a really good grasp of the detail in this area and the complexities of this area,” said Saunders.

She added the risks inherent in investment chains could be managed through training (“more than occasional training”); “clear, detailed and widely understood” terms of reference; appropriate contracts; improved dialogue with investment managers; a sound approach to conflicts of interest; and a robust system for ensuring information moves up and down an investment.

“It’s just not possible to have a grasp of the detail and complexity,” said Saunders, “unless you have good governance.”

Metrics

The LGPS webinar also heard from Thomas Hohne-Sparboth, a senior sustainability analyst at Lombard Odier. He identified carbon emissions as a key metric for funds to judge whether companies present a climate risk to investment portfolios.

However, he added that carbon emissions was best used alongside trend data that would allow fund managers to judge whether companies, even those in high emitting sectors, were on track to meet “temperature alignment’ expectations.

Using the metrics together opens the way for “high conviction” investment strategies, Hohne-Spaborth said.

“It’s these high conviction strategies that might provide exposure to companies embarking on a transition or indeed providing many of the solutions that the climate transition will ultimately rely on. And some of these strategies, we feel, will be much more needed as we try to tackle climate risk systematically.”

To see the full webinar click here.