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Local Pensions Partnership

PRI reporting framework 2020

You are in Strategy and Governance » ESG issues in asset allocation

ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

13.1. Indicate whether the organisation carries out scenario analysis and/or modelling, and if it does, provide a description of the scenario analysis (by asset class, sector, strategic asset allocation, etc.).

Describe We are annually reviewing the emissions intensity of the LPPI Global Equities Fund against pathways needed to achieve targets under the Paris Agreement. The review is undertaken by an external data provider who uses IEA /IPCC scenarios to estimate global emissions reduction pathways and plot our current position against these.

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]

Rather than shaping strategic asset allocation, our integration of ESG issues forms part of the analysis we undertake in fulfilling our strategic asset allocation.

Our efforts focus on the selection of sustainable assets with strong ESG credentials and on the appointment of delegate managers who meet our requirements for routinely integrating material ESG considerations into their investment decision-making on behalf of client pension funds.


SG 13 CC.

13.4 CC. Describe how your organisation is using scenario analysis to manage climate-related risks and opportunities, including how the analysis has been interpreted, its results, and any future plans.

Describe

In the Annex on Climate Change to the LPPI Responsible Investment Policy we state our beliefs in the material, systemic and idiosyncratic nature of the risks Climate Change could manifest in our investment portfolio over time. To help us begin to recognise and address these potential risks we have developed definitions for Transition and Physical Climate Risk. There is a broad understanding that in different temperature scenarios the physical and transition risks we face will differ.

Currently, our risk focus is directed at asset level. This complements LPP's investment style (based on fundamental analysis) and reflects our appreciation that idiosyncratic climate risks are especially material to real assets and are also context specific.

For direct investments in real assets, we seek to consider the key transition and physical climate risks that may pose hazards to the prospective asset and we interpret these as stresses which are relevant to the valuation. Our focus is on seeking to understand potential climate risk impacts in different situations.

Future plans include using the learning and insights we are gaining from introducing scenarios to our decision-making on individual assets to develop frameworks for more general thematic and sectoral thinking about climate risks.  This reflects that we recognise some risks will be common across asset classes or relevant to multiple sectors.  Insights being gained across different areas need to be captured and communicated in an efficient way that helps to inform, enrich and evolve our collective thinking and learning about climate change.   

Describe

LPPI has begun the process of incorporating climate scenario analysis into investment analysis by focussing on direct investments in real assets (infrastructure).

Our process involves considering which key climate hazards (transition and physical risks) apply in each case, how and when they may materialise and what impact they may have in different possible future scenarios.  Through this approach, material climate risks are being identified and subjected to further analysis focussed on considering the most appropriate bases for quantifying and including estimated financial outcomes within the valuation model.

This is an initial approach which has been successful in assisting investment staff to understand the logic and become more comfortable identifying and analysing material climate risks in an objective and systematic way.

Future plans involve developing our approach to incorporating sensitivities within financial modeling. Robust estimates and reasonable proxies are needed as a basis for anticipating and modeling the operation and impact of different types of climate risk on future investment performance.

13.5 CC. Indicate who uses this analysis.

13.6 CC. Indicate whether your organisation has evaluated the potential impact of climate-related risks, beyond the investment time horizon, on its investment strategy.

Describe

The time horizon of investments varies by asset class and reflects the investment team's view on multiple macroeconomic factors and asset class return profiles.

Our client pension funds have liabilities extending beyond 50 years, the investment time horizon of a material portion of our assets is also long term.

Whilst the impacts of climate change also extend well into the future, specifically those faced from physical climate risk, the lost cash flows may be priced into market valuations sooner. For example, the impact of rising sea levels may be felt through a greater flood risk to real estate assets. This is a material risk and will continue increasing due to climate change.

For some years, our real estate portfolio has operated a policy that all acquisitions must be in areas with a less than 1 in a 1000 year flood risk.  Current acquisition policy includes assessing both current and future flood risk in the context of expected sea level rise over the coming decades.  As part of an ongoing work plan to achieve a portfolio compatible with a carbon-neutral Britain, future flood risks will also be assessed for all existing properties.

13.7 CC. Indicate whether a range of climate scenarios is used.

13.8 CC. Indicate the climate scenarios your organisation uses.

Provider
Scenario used
IEA
IEA
IEA
IEA
IEA
IRENA
Greenpeace
Institute for Sustainable Development
Bloomberg
IPCC
IPCC
IPCC
IPCC
Other

Other (1) please specify:

          Low Energy Demand
        
Other
Other

SG 14. Long term investment risks and opportunity

14.1. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following are considered.

14.2. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

14.3. Indicate which of the following tools the organisation uses to manage climate-related risks and opportunities.

14.5. Additional information [Optional]

As set out in the LPPI Responsible Investment Policy - Annex on Climate Change, we are using the Transition Pathway Initiative Management Quality Tool to assess companies on their transition governance, planning and actions. We have set a minimum target for "extractive" fossil fuel companies to achieve a ranking of TPI 3 . Our target was 100% achieved as at 31 December 2019.


SG 14 CC.

14.6 CC. Provide further details on the key metric(s) used to assess climate-related risks and opportunities.

Metric Type
Coverage
Purpose
Metric Unit
Metric Methodology
Portfolio carbon footprint
          Monitoring the carbon footprint of our Global Equities Fund,  in order to identify the overall trend over time and be able to report to client pension funds.
        
          Tonnes CO2 per £m of market cap
        
          Total portfolio carbon emissions divided by the market capitalisation of the portfolio. 

The trend of this metric has been downwards.
 
The limitations to this metric include market price fluctuations which introduce distortion.
        
Total carbon emissions
          
        
          
        
          
        
Carbon intensity
          Monitoring the carbon intensity of our Global Equities Fund,  in order to identify the overall trend over time and be able to report to client pension funds.
        
          Tonnes CO2 per £m revenue
        
          Total portfolio carbon emissions divided by portfolio revenue.

The trend of this metric has been downwards.

The limitations to this metric include market price fluctuations which introduce distortion.
        
Exposure to carbon-related assets
          
        
          
        
          
        

14.8 CC. Indicate whether climate-related risks are integrated into overall risk management and explain the risk management processes used for identifying, assessing and managing climate-related risks.

Please describe

Currently climate related risk management is focussed at investment decision level, addressed by asset class teams as part of the due diligence that precedes the selection of assets and the appointment of delegate asset managers.

Where material climate risks (physical or transition) are identified as part of detailed due diligence, they are considered in the same way as other risks. They are quantified and fed into asset valuations through stress testing and the adjustment of financial inputs which ensure they feature in the modelling of expected performance. 

To integrate climate related risks into overall (portfolio level) risk management requires further work and involves us developing methodologies for identifying and valuing climate risks across a variety of time horizons and scenarios. To support our progress against this important objective LPPI has convened  a cross disciplinary Climate Risk Panel.  The Panel will bring together representatives from the Risk, Investment Strategy and Responsible Investment teams to collaborate on the identification of potential methods preparatory to developing a pilot approach for discussion and testing. 

 

14.9 CC. Indicate whether your organisation, and/or external investment manager or service providers acting on your behalf, undertake active ownership activities to encourage TCFD adoption.

Please describe

LPPI publicly supports the TCFD, as demonstrated in the statement of commitment our Chair Michael O'Higgins has made via the A4S (Accounting for Sustainability) initiative. 

As part of our annual reporting LPP disclosed in line with the TCFD recommendations for the first time in 2019, reflecting the belief we should set an example and undertake for ourselves what we are asking companies and asset managers to work towards.

Our wider advocacy for disclosure in line with TCFD recommendations is via our participation in initiatives including the Transition Pathway Initiative, ClimateAction100+ and IIGCC.

As part of shareholder voting LPPI has supported a number of shareholder proposals in 2019 requiring companies to disclose more climate related information for the benefit of investors.

One of our listed equity managers has focused an engagement theme on climate action and sound environmental management which has asked companies to align with TCFD principles and where appropriate produce TCFD disclosure.


SG 15. Allocation of assets to environmental and social themed areas

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.4. Please attach any supporting information you wish to include. [OPTIONAL]



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