Cheshire in the vanguard on TCFD carbon revelations

Its Climate Risk Report, published on September 15, found that the footprint of its equity investments is 30 per cent below the general market, represented by the FTSE All-World Index.

The new report follows recommendations of the Task Force on Climate-related Financial Disclosures, a blueprint for climate reporting that represents best practice in the investment industry.

We don’t want to see investments that are profitable at the moment become stranded assets

Cllr Myles Hogg, Cheshire Pension Fund Advisory Committee

TCFD reporting is set to become mandatory for private sector pension schemes across the UK, with the staged introduction set to begin with the largest 100 plans by the end of 2022. Some schemes, including Cheshire and the scheme of banking giant HSBC, have already taken steps to pre-empt the regulations, which may be extended to the public sector.

Cllr Myles Hogg, chair of the Cheshire Pension Fund Advisory Committee, says: “We believe that the publication of our report places our fund as one of the leaders of the Local Government Pension Scheme funds when it comes to managing climate-related risk.

“There has been a step change, particularly over the past three or four years, of people becoming more and more aware that there is a growing risk of climate change, and this will be a significant risk factor in the future. We don’t want to see investments that are profitable at the moment become stranded assets.”

Mr Hogg adds: “There is a growing range of low-carbon investment opportunities, particularly in the equity class. Unfortunately, sustainable and low-carbon investments are not so well developed in other asset classes like bonds.”

He says reporting has been helped by Cheshire’s involvement in the LGPS Central pool, but adds: “Measuring the carbon footprint is a major challenge for us. Not every asset class has its carbon data metric well developed. Even within the asset class, there are a variety of estimations and calculation methodology.”

The data is “getting better”, but its compilation “is time-consuming and expensive”, he says.

Further moves to come

The fund will also publish a climate strategy, which will encapsulate all its policies on the environment and managing climate risk into one document, by Christmas.

The publication of the report follows an in-depth review from Mercer of the climate risks of the fund’s investment portfolio, which showed that the fund has less exposure to companies with fossil fuel reserves and those exploiting coal reserves than the general market. It reveals that the portfolio has more investments with companies that use clean technology than the general market.

The fund invests in five different equity funds, and all except one have a lower carbon footprint than the general market index. The one strategy with a higher carbon footprint will now be reviewed to identify potential alternative investment funds.

Mercer’s review also concluded that the fund’s carbon footprint and other carbon metrics had improved since it took the decision to invest more than £500m in a new climate factor strategy in October 2019.

The review could not draw any firm conclusions regarding the carbon footprint of the fund’s bonds portfolio, as the general poor availability of carbon metrics in this asset class hampered efforts to benchmark the strategy in this sector.

The TCFD report also considers the risk and return characteristics of the Cheshire fund’s investment portfolio under various climate scenarios, including an increase in global temperatures of 2C, 3C and 4C.

Under all scenarios, the review found there would be a minimal impact on the expected annual investment returns for the fund projected to 2050. It credited its diversification with a large allocation to government debt and fixed income, the asset classes that are the most resilient and which are least affected by climate-related risks.

Cheshire’s report also boasted of 150 engagements via the LGPS on climate change in 2019. Meanwhile, EOS at Federated Hermes conducted an additional 238 engagements on behalf of the Central pool, with a particular focus on non-domestic companies.

Other pension funds that have been early adopters of the TCFD recommendations include Nest, RPMI Railpen, The Pensions Trust, and the Environment Agency Pension Fund.

“TCFD recommendations have no direct application to the LGPS,” explains Bob Holloway, pensions secretary to the Scheme Advisory Board.

But he adds: “There is an expectation from the government that the Ministry of Housing, Communities and Local Government will come forward with broadly comparable provisions for the LGPS.

“Discussions between the scheme advisory board, MHCLG and the Department for Work and Pensions will commence shortly to discuss the scope and content of such provisions for the LGPS.”

Establishing the carbon footprint of investee companies remains challenging. Joe Dabrowski, head of defined benefit, LGPS and standards at the Pensions and Lifetime Savings Association, says despite “more choice in the market” in terms of environmental, social and governance products, further work is needed on data and reporting.

Investment houses behind curve

For all the proliferation of new green products, a recent study carried out by Redington’s manager research team has shown that more than a third of asset manager respondents were unable to provide an example of a climate change-related engagement effort.

Moreover, despite 76 per cent of managers surveyed saying they consider climate-related risks and opportunities, the company’s analysis found that just 60 per cent can provide an example of when these factors have actually influenced buying or selling decisions.

Penny Cogher, partner at Irwin Mitchell, says: “Given this, it seems as though even those larger schemes [including the LGPS] that trumpet what they do on ESG matters are way behind the curve — not due to their own failings necessarily, but due to industry failings. It seems more like the Emperor’s new clothes than actual change.”

None of the recent regulations have changed trustee fiduciary, and trust law, duties.

Stuart O’Brien, partner at Sackers, explains: “The various regulations to date are all about disclosure. Behaviours have started to change, but I think we’re still a way off that feeding through to changing investment allocations, manager appointments or engagement activities.”