NILGOSC considers the disclosure of climate risks and opportunities to be essential if shareholders are to determine whether the companies in which they invest are adequately addressing the changing climate.
In December 2015, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. In 2017, the TCFD released its climate-related financial disclosure recommendations.
NILGOSC actively supports the TCFD recommendations and was added to the TCFD website’s official list of supporters in June 2020. The recommendations and a full list of supporters can be found at https://www.fsb-tcfd.org/.
NILGOSC also signed the 2018 Global Investor Statement to Governments on Climate Change which was relaunched in 2019. The final version of the Statement was signed by 631 investors managing over $37 trillion (USD) in assets, and reiterates the call for full and urgent implementation of the Paris Agreement by national governments. It also calls on Global leaders to “commit to improve climate-related financial reporting” by doing the following:
- Publicly supporting the TCFD recommendations and the extension of its term;
- Committing to implement the TCFD recommendations in their jurisdictions, no later than 2020;
- Requesting the FSB incorporate the TCFD recommendations into its guidelines; and
- Requesting international standard-setting bodies incorporate the TCFD recommendations into their standards.
NILGOSC is a supporter signatory to Climate Action 100+, which is an investor initiative that was launched in 2017 to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
One of the specific aims of the initiative, which has been signed up to by 545 investors with nearly $52 trillion (USD) of assets under management, is to secure commitments from the boards and senior management of the target companies to:
Provide enhanced corporate disclosure in line with the final recommendations of the TCFD and, when applicable, sector-specific Global Investor Coalition on Climate Change Investor Expectations on Climate Change to enable investors to assess the robustness of companies’ business plans against a range of climate scenarios, including well below 2 degrees Celsius, and improve investment decision-making.
The TCFD recommends that “all financial and non-financial organizations with public debt or equity implement its recommendations”. The recommendations also state that “the Task Force believes that asset managers and asset owners, including public and private-sector pension plans, endowments, and foundations, should implement its recommendations.”
The TCFD has structured its recommendations around four thematic areas that represent core elements of how organisations operate: governance; strategy; risk management; and metrics and targets. More information and the full recommendations can be found at https://www.tcfdhub.org/.
NILGOSC plans to formally report in line with the TCFD recommendations for the year ended 31 March 2021 (aligned with its Annual Report for 2020/21). However, as an initial step, NILGOSC’s current approach to managing climate risk within the TCFD’s four thematic areas is set out below:
|Governance||NILGOSC is the corporate body responsible for the administration of the Local Government Pension Scheme in Northern Ireland and is managed by a Management Committee (the Committee). The Committee is responsible for approving and monitoring NILGOSC’s Statement of Investment Principles, Statement of Responsible Investment and Climate Risk Statement, all of which are reviewed on a regular basis and updated as necessary. The Statement of Investment Principles and Statement of Responsible Investment set out NILGOSC’s approach to incorporating responsible investment considerations, including climate risk, into its investment strategy and decision-making process. The Climate Risk Statement acknowledges the individual importance of climate risk as an investment issue and sets out the steps which will be taken to address it, both at a policy and portfolio level. In addition to setting out how climate risk is taken into account across the range of assets in which it invests, the Statement also sets out how NILGOSC will consider the opportunities that the changing climate presents. All documents are publicly available via NILGOSC’s website on Being a responsible investor.|
All external managers are appointed by the Committee and selection exercises incorporate mandatory criteria in respect of the ability to take climate risk into account in the investment process. The Committee reviews performance on a quarterly basis by way of a balanced scorecard which assesses managers against a range of qualitative criteria, one of which relates to the inclusion of environmental, social and governance factors in the decision-making process. In addition, the Committee receives an annual briefing report on each individual investment manager which includes a dedicated section on environmental, social and governance (ESG) performance.
The Committee receives regular training on responsible investment, including climate risk, through a combination of inhouse training and attendance at external conferences.
Day to day implementation of NILGOSC’s climate risk policy and responsible investment strategy is delegated to the Secretary and the Investment team, with primary responsibility sitting at a senior management level with the Investment Services Manager. The Investment Team are responsible for monitoring the ESG performance of external managers and specifically managers’ compliance with NILGOSC’s Climate Risk Statement. NILGOSC has developed a bespoke Proxy Voting Policy which sets out its expectations for good corporate governance, including how companies manage their impact on society and the environment. This policy sets out how NILGOSC addresses sustainability related resolutions, including specific reference to climate risk and climate related financial disclosures. Full disclosure of NILGOSC’s voting policies and records are available on Voting policies and activity.
The Investment team are also responsible for liaising with the Investment Advisor to ensure that climate risks and opportunities are taken into account when setting the investment strategy and selecting individual funds and managers. NILGOSC will only appoint fund managers and consultants who have demonstrated that they meet an acceptable threshold for ESG capabilities.
NILGOSC seeks to collaborate with like-minded investors and shares knowledge and resources on managing climate risk through its membership of industry initiatives including UNPRI, IIGCC and Climate Action 100+.
|Strategy||In its Climate Risk Statement, NILGOSC classifies climate risk into three broad categories, which are applicable across the range of asset classes in which it invests. Different asset classes will be susceptible to different risks and over different time frames, with some more sensitive than others even within a particular asset type or sector. As a general rule, listed assets such as equities and bonds are likely to see a much quicker impact of policy change than real assets such as property or infrastructure.|
(i) Policy risk – the impact of policy decisions and regulatory change on global economies, companies and individual investments is considered to be both a short and medium term risk as the exact timescales of necessary changes remains unclear. Current global policy is not aligned with the aims of the Paris Agreement and it is not clear how quickly, if at all, governments will act to meet their commitments.
(ii) Physical risk – the impact of extreme weather, flooding, droughts and rising sea levels on industry, physical assets, companies and infrastructure is considered a medium to longer term risk.
(iii) Technology risk – the risk that key low/no carbon technologies do not deliver as planned is considered a short to medium term risk and is linked to the pace of policy change.
The changing climate also provides opportunities for investors and, like risk, these will vary across asset classes, sectors and individual portfolio holdings. NILGOSC has instructed its Investment Advisor to consider opportunities arising from climate change in the provision of advice, including the proactive consideration of opportunities to invest in low carbon assets. With respect to its real asset allocation, NILGOSC encourages its managers to consider investment opportunities in low carbon infrastructure and real estate where appropriate.
The primary risk to NILGOSC is that its investment strategy and individual portfolios are not properly positioned to avoid the risks or avail of opportunities presented by the changing climate. As the investment strategy is intrinsically linked to the funding strategy, any material impact on investment returns will result in changes in the cost to scheme employers. As set out in the Climate Risk Statement, NILGOSC has developed a suite of procedures and policy documents which set out how climate risks and opportunities are incorporated into its investment processes and practice. NILGOSC’s assets are externally managed and managers are required to incorporate ESG factors including climate risk into the investment decision making process, in line with NILGOSC’s Statement of Investment Principles, Statement of Responsible Investment and Climate Risk Statement.
NILGOSC’s corporate plan includes a strategic objective to invest scheme funds in accordance with the Statement of Investment Principles and the Statement of Responsible Investment. Underneath this sits an operational action to implement the Statement of Responsible Investment and Climate Risk Statement.
The Investment team has worked with its external managers to identify those elements of individual portfolios which have a higher exposure to carbon. Challenges continue to exist in respect of the limitations and backward-looking nature of carbon disclosures. However, NILGOSC is seeking to undertake a portfolio-wide carbon analysis in the first half of 2021. The outcome of this exercise will help determine the next step in assessing NILGOSC’s exposure to various climate outcomes.
|Risk Management||NILGOSC’s Climate Risk Statement sets out how it will identify and classify climate risks together with the steps which it will take, both at a policy and portfolio level. On a day to day basis, climate related factors and risks are managed on a delegated basis by individual fund managers. The Statement requires that where climate change produces a financial risk for a particular investment, NILGOSC expects this to be a fundamental part of the investment decision making process and will monitor such decisions accordingly. Quarterly reporting requirements, including engagement activity, are set out in contractual arrangements and are subject to ongoing review by the Investment team.|
NILGOSC has instructed its Investment Advisor to consider the impact and opportunities presented by climate change in the provision of advice, both at an overall strategy level and individual investment level.
The processes for managing climate-related risks are set out in NILGOSC’s Climate Risk Statement. Its approach is essentially a blend of top down (asset allocation) and bottom up stewardship (individual holdings). Climate risks and opportunities are taken into account at a strategic asset allocation level with specific advice sought from the Investment Advisor as part of the investment strategic review process.
The primary way in which NILGOSC manages its climate related risks is through its stewardship activities. NILGOSC has developed a bespoke Proxy Voting Policy which sets out its expectations for good corporate governance, including how companies manage their impact on society and the environment with specific reference to climate risk and climate related financial disclosures. NILGOSC uses its ownership rights to ensure that companies provide accurate and timely disclosure of the material risks and opportunities associated with climate change. Through the exercise of its voting rights and targeted engagement, NILGOSC encourages companies to be transparent and accountable in respect of their impact on the environment, e.g. through the setting of targets and time-frames for the reduction of greenhouse gas emissions. Where such disclosure is lacking, or where there are shortcomings in the steps taken to address climate risks and opportunities, NILGOSC will engage with companies either directly or by joining together with like minded investors in UNPRI facilitated or similar collaborative initiatives. NILGOSC also encourages its real asset managers to adopt sustainable asset management practices with respect to its infrastructure and property holdings and monitors progress through the quarterly monitoring process.
NILGOSC will only appoint fund managers and consultants who have demonstrated the necessary expertise in assessing climate risk. NILGOSC assesses these capabilities at the selection and appointment stage, through the application of mandatory ESG criteria in the tender process.
NILGOSC’s strategic risk register includes a number of investment related risks, one of which is that responsible investment considerations are not taken into account in the implementation of the investment strategy. The primary consequences of this risk materialising are documented as: reduced investment returns; reputational risk resulting in loss of confidence in the Scheme; potential for adverse publicity. Ownership of the Strategic Risk Register sits with the Committee, with quarterly assurance provided by the Investment Services Manager and team.
|Metrics and Targets||NILGOSC is currently exploring options to undertake a portfolio-wide carbon exposure analysis in the first half of 2021. The purpose of this exercise is to identify a meaningful measure of NILGOSC’s carbon exposure and to inform further action in this area. Next steps are expected to include further analysis of the impact of certain climate scenarios and consideration of appropriate metrics for future measurement and monitoring. NILGOSC will make the outcome of the analysis publicly available once it is completed.|