Investors issue a stern notice: "Prioritizing clients above all else is crucial for stewardship congruence"
In the heart of Westminster, investors from the UK's Local Government Pension Scheme (LGPS) and asset owners and managers from around the world gathered for the LAPFF mid-year conference. The focus of the discussion was the trends in climate stewardship for LGPS investors.
One of the key trends emerging is the integration of net zero and climate risk considerations into investment and governance frameworks. The UK’s The Pensions Regulator (TPR) has taken the lead, setting up a working group to develop a voluntary net zero transition plan template for occupational pension schemes, including LGPS.
The LGPS Scheme Advisory Board has also updated its guidance on Funding Strategy Statements (FSS), now explicitly expecting pension funds to recognize and consider funding issues associated with climate change. This shift reflects a growing consensus on the importance of stewardship for sustainable financial returns and climate impact.
However, LGPS investors face several challenges. One of the main issues is the tension between government expectations for LGPS funds to invest more in local economic growth and sustainability, and the reality of limited pipelines of investable sustainable assets. LGPS funds are calling for more clarity, access, and support to deploy capital into local sustainable development without shouldering disproportionate risk.
Another challenge is achieving global net zero targets, with the UN warning that hitting net zero by 2050 globally is now "virtually zero." This underlines the difficulty pension schemes face in aligning with ambitious climate goals while balancing fiduciary duties and returns.
Regarding potential divestments, there is no evidence that LGPS investors are broadly moving toward divesting fossil fuels en masse. Instead, the focus seems to be on active stewardship, engagement, and transitioning portfolios towards net zero over time.
Political impacts, including influence from parties like Reform UK, create a complex context that LGPS funds must navigate. While there is no direct mention of Reform UK affecting LGPS climate stewardship or divestment policies, political parties with anti-ESG or skeptical views on climate action generally create a challenging environment for pension funds to embed ESG strategies.
Despite some political opposition, many schemes maintain climate commitments, reflecting a complex political and social landscape. The role of political parties like Reform UK is more indirect, contributing to a challenging environment that LGPS funds must navigate.
One speaker at the event expressed concern about asset managers not being rigorous in their stewardship regarding climate change. Another suggested a system-wide approach to tackling climate change, shifting away from notions of beating the benchmark towards systemic stewardship.
JP Morgan Asset Management identified a significant opportunity for asset managers who stand firm on climate issues to tap into growing demand from European asset owners. The focus on alpha, or individual investment performance, has been harmful, as it has taken attention away from tackling climate change at a systemic level.
The current trends in climate stewardship for UK LGPS investors focus on strengthening their commitment to net zero and climate risk considerations, improving regulatory guidance, updating funding strategies, and increasing investment in climate-aligned assets. Despite the challenges, LGPS investors remain committed to navigating this complex landscape and contributing to a more sustainable future.
[1] The Pensions Regulator, "Net Zero Transition Plan Working Group," accessed April 20, 2023, https://www.thepensionsregulator.gov.uk/en/news/net-zero-transition-plan-working-group [2] Local Government Chronicle, "LGPS investors face challenges in climate stewardship," accessed April 20, 2023, https://www.localgov.co.uk/lgps-investors-face-challenges-in-climate-stewardship/11-04-2023 [3] LGPS Central, "Climate change and investment: a guide for trustees," accessed April 20, 2023, https://www.lgpscentral.org/wp-content/uploads/2022/01/Climate-change-and-investment-a-guide-for-trustees.pdf [4] Pension Funds, "LGPS funds call for clarity, access, and support to invest in local sustainable development," accessed April 20, 2023, https://pensionfunds.org.uk/news/lgps-funds-call-for-clarity-access-and-support-to-invest-in-local-sustainable-development/
- The integration of climate risk considerations into investment and governance frameworks, as part of the focus on net zero, is a key trend in environmental-science, particularly within the UK's Local Government Pension Scheme (LGPS).
- In the territory of finance and business, LGPS funds are advocating for more clarity, access, and support to invest in local sustainable assets, acknowledging it as a crucial challenge for sustainable financial returns and climate impact.
