Agenda item

Report of the Director of Finance and presentation by LGPS Central Limited

The Committee received a report of the Director of Finance relating to the Climate Change Strategy for the Staffordshire Pension Fund (‘the Fund’).

Climate Risk Report 2022

The Committee received a presentation from Basyar Salleh and Alex Galbraith from LGPS Central, relating to the Fund’s third Climate Risk Report.

The presentation supported the 2023 Climate Risk report which assessed the Fund’s exposure to climate-related risks and opportunities, and allowed the Fund to identify further means to manage its material climate risks. The presentation also highlighted the report’s key findings and provided an overview of the Fund’s progress in managing climate risk. The presentation focused on the following areas:

• Holdings, Metrics & Analysis
• Carbon Intensity

• Financed Emissions
• Weight in Clean Tech and Fossil Fuel Reserves
• Top 5 Contributors
• Climate Scenario Analysis
• Climate Stewardship Plan

The presentation concluded that the Fund had made significant progress in its responsible investment and climate change practice. The key recommendations suggested that the Fund should:

• Continue with the development of the net zero strategy;
• Continue to report against the Task Force on Climate Related Financial Disclosures Recommendations;
• Work with fund managers to understand how they assess, monitor and mitigate key climate change risks; and
• Repeat the Carbon Risk Metrics annually and the Climate Scenario Analysis every 2-3 years.

A concern was raised about the validity of the metrics being measured and how they helped the Fund to achieve the target of Net Zero. It was suggested that it would be better to compare against a portfolio of comparable companies. LGPS Central acknowledged that, whilst there would be some merit in comparing against other portfolios, they did not have the tools in place to do so at this time. LGPS Central did compare the 40-year projection of the current asset allocation under different scenarios and some further analysis was included in the full report. It was noted that there was only a limited number of ways in which metrics could be measured currently, but new processes and technologies were constantly being introduced which might help the Fund achieve its target.

It was acknowledged that whilst the LGPS Central pool was a powerful resource, there seemed to be an issue with engagement with the smaller companies within the portfolio, and it was suggested that LGPS Central should focus on the smaller companies that weren’t supporting the Fund in achieving its targets. In response it was explained that within the portfolio 20% of companies created 80% of emissions, and the organisations that had been identified and engaged with were considered to be the largest polluters. It was clarified that, no matter the size of the organisation, if companies didn’t meet the expectations of LGPS Central, they would be engaged with and any concerns would be escalated and, if necessary, directors and resolutions would be voted against.

In response to a question asking if there were any plans to measure other polluting actions other than carbon, it was explained that this was considered in the analysis and some information about this was included in the full report.

Task Force on Climate Related Financial Disclosures (TCFD) Report

The Committee was informed that the Taskforce on Climate-Related Financial Disclosures (TCFD) was commissioned in 2015. In 2017, the TCFD released its recommendations for improved transparency, and the TCFD Report was considered a best practice document for asset owners and institutional investors to report on climate risks. The Fund’s latest TCFD Report, which presented the latest Carbon Risk Metrics Analysis, was attached at Appendix 2 to the report. The TCFD Report also described the way in which climate-related risks were currently managed by the Fund.

Climate Change Strategy

The Staffordshire Pension Fund’s Climate Change Strategy (CCS) was approved by the Pensions Committee at its meeting on 11 February 2022 and set out the Fund’s approach to managing the risks and opportunities presented by climate change. The CCS had no structural changes from the original version approved in February 2022 but had been updated with the latest performance against the 2030 targets. This was based on data from the 2022 Climate Risk Report and demonstrated good progress towards the 2030 targets.

In response to a query raised about developing a plan to help the Fund achieve its 2050 targets by using forward focussed data, rather than improvements made against past targets, it was confirmed that plans were in place to support this, such as the climate risk scenarios modelled  by LGPS Central. LGPS Central also acknowledged that, whilst the current data was focussed on performance against historic figures, investment was being made to provide forward looking data. It was the intention that LGPS Central would be able to provide forward focussed data in the 2024 Climate Risk Report.

Climate Stewardship Plan 2023/24

The Committee was informed that the Climate Stewardship Plan aimed to focus the Fund’s engagement on the investments in companies which had the most impact on the Fund’s climate risk metrics. The Fund’s Climate Risk Report for 2022 contained recommendations to update the Fund’s current Climate Stewardship Plan (presented at Appendix 4 to the report), with the addition of one utility company. The Climate Stewardship Plan was a working document which would be updated as engagement with companies occurred, via the Fund’s external partners. This activity would continue to be reported quarterly to the Pensions Panel, as part of the Responsible Investment and Engagement Report.

Resolved:

a.    That the presentation from LGPS Central Limited on the 2022 Staffordshire Pension Fund Climate Risk Report, be noted, and Messrs Salleh and Galbraith be thanked for their presentation.

b.    That the Task Force for Climate Related Disclosures Report, be noted

c.    That the Climate Change Strategy, be noted

d.    That the Staffordshire Pension Fund’s Climate Stewardship Plan 2023/24, be noted.