Insert date www.local.gov.uk LGPS update Lorraine Bennett Senior pensions adviser
Insert date www.local.gov.uk
LGPS update
Lorraine Bennett Senior pensions adviser
www.local.gov.uk
What’s on the agenda?• Impact of COVID-19
• Age discrimination – McCloud case
• Exit payment reforms
www.local.gov.uk
COVID-19• working arrangements – short term at
home, longer term hybrid • administering authorities adapted
differently to challenges of home working and returning to the office
• high level of confidence about processing core workload – not so confident about other work
• areas of concern – new requirements, recruitment, training and staff wellbeing
www.local.gov.uk
COVID-19• most committees and
boards meeting virtually - desire to return to face to face
• minority of employers in difficulty – will this be sustained?
www.local.gov.uk
McCloud – age discrimination • protections provided to older
members when schemes reformed are unlawful
• Government consultation on how to extend protection to younger members closed October 2020 – await response
www.local.gov.uk
McCloud – age discrimination
‘underpin’ protection will go beyond current protection
protection will end for all from April 2022
lots of extra work – collecting data, revisiting all leavers since April 2014
uncertainty about annual statements, transfers, tax implications etc
www.local.gov.uk
Exit payment cap - £95k cap• in force from 4 November 2020
• strain cost included in exit payments
• waiver process
• LGPS regulations not yet changed to accommodate it
• clash between exit cap and LGPS regulations
www.local.gov.uk
The exit cap ‘pickle’• LGPS authorities to decide
whether to pay an unreduced pension
• employers to decide whether to pay a cash alternative
• risk of challenge whatever happens
• judicial reviews given permission – will be heard 24/25 March
www.local.gov.uk
Further reform to exit payments• MHCLG consultation on changes to exit pay ended 9 November
2020• will introduce changes to accommodate the exit cap• also included proposals to limit amount of discretionary
compensation pay for all • over 55s offered more choice but exit packages will be reduced
for most members
www.local.gov.uk
www.local.gov.uk
Also on the horizon
Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority
Good Governance
Implementation PhaseCatherine McFadyen26 January 2021
2
Phase 1 and 2 - proposals
Managing Conflicts of
InterestRepresentation Knowledge and
UnderstandingService Delivery
Full reports are availablehttps://www.hymans.co.uk/media/uploads/Hymans_Robertson_Good_governance_in_the_LGPS_July_2019_final.pdf
https://www.hymans.co.uk/media/uploads/Hymans_Robertson_Good_governance_in_the_LGPS_Phase_II.pdf
Senior LGPS Officer, Enhanced Governance Compliance StatementStatutory Guidance
Independent Governance Review, Peer Review Process
3
Phase 3 - Implementation
Progress On Working On
• Independent governance review process
• Training requirements
• Conflicts guidance
• Specifying senior officer role
• Developing KPIs
• Sample Governance Compliance Statement
4
Timeline
November/December 2020 Collating Input
January 2021Drafting of Papers for SAB
February 2021Final implementation proposals to SAB
This Powerpoint presentation contains confidential information belonging to Hymans Robertson LLP (HR). HR are the owner or the licensee of all intellectual property rights in the Powerpoint presentation. All such rights are reserved. The material and charts included herewith are provided as background information for illustration purposes only. This Powerpoint presentation is not a definitive analysis of the subjects covered and should not be regarded as a substitute for specific advice in relation to the matters addressed. It is not advice and should not be relied upon. This Powerpoint presentation should not be released or otherwise disclosed to any third party without prior consent from HR. HR accept no liability for errors or omissions or reliance upon any statement or opinion herein.
Thank you
ESG refresher
LGA Fundamentals Training
January 2021
2Confidential | Ninety One
Target audience
Target audienceThis document is being provided for informational purposes for discussion with institutional investors and financial advisors only. Circulation must be restricted accordingly.Nothing herein should be construed as an offer to enter into any contract, investment advice, a recommendation of any kind, a solicitation of clients, or an offer to invest in any particular fund, product, investment vehicle or derivative.
General risksThe value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations.Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.
3Confidential | Ninety One
Today’s agenda
ESG refresher
1. ESG Terminology and Jargon Busting
2. Why is it important for the LGPS?
3. Case study
4. What to keep an eye on in the coming months
5. ESG presents risk and opportunity
Climate change: A closer look
Joshua KriskinansManager, LGPS Client team
Atul ShinhInvestment Director, Multi Asset
4Confidential | Ninety One
Key takeaways
ESG is crucially important and part of your
Fiduciary duty as Board and Committee members
Challenge your managers to evidence ESG integration.
Watch out forgreenwashing
ESG factors present risk and opportunity
5Confidential | Ninety One
Terminology and Jargon Busting
Source: MSCI
Environment Social Governance
- Climate Change - Natural resources- Pollution & waste- Environmental Opportunities
- Human capital- Product Liability - Stakeholder opposition- Social opportunities
- Corporate Governance - Corporate Behaviour
What is ESG?
6Confidential | Ninety One
Terminology and Jargon Busting
Source: Ninety One
- Companies that do not consider and disclose the likelihood and impact of material sustainability factors (including climate change) attract engagement attention.
Types of engagement
Our engagements are categorised into
– Strategic
– Communication
– Advocacy
Why do we engage?
To preserve and grow our clients’ capital over the long term
– Sustainability of earnings and the creation of capital
– Improve transparency of information
– Improve governance
– Benefits to society
Our philosophy
Engagement is a process of diplomacy and research –more of an art than a science. There is no single approach that will fit all cases
Divestment Vs Engagement
7Confidential | Ninety One
Terminology and Jargon Busting
Source: Creating Impact: The promise of Impact Investing, International Finance Corporation
ESG integration- Ensure the analysis of ESG risks and opportunities are integrated into the investment process
Impact investing
- Intent - Investing to generate a positive impact as well as investment return
- Contribution – The actions of the impact investor contribute to the achievement of the intended goal
- Measurement – Can you measure the impact?
- Doesn’t mean you have to sacrifice investment returns- Can be achieved through public and private markets- As the age profile of LGPS funds change, likely to see increased demand for impact investments
ESG integration to Impact investing
8Confidential | Ninety One
Why is ESG important for the LGPS?
Source: London Borough of Southwark Pension Fund, Investment Strategy Statement 2019/20
- Fiduciary duty – The primary responsibilities of local authority pension funds is to pay members’ pensions.
- Regulatory requirement – Investment Strategy Statement
- Reputational risk – Scrutiny of fund holdings
- Pooling - Collaboration
9Confidential | Ninety One
Why is ESG important for the LGPS?Integrating ESG within investment strategies
Source: Ninety One
Universescreening
Fundamental Analysis
Active ownership
Portfolio constructionand monitoring
2 3 4 1
– Ensure the analysis of ESG risks and opportunities are integrated into the investment process
– Each asset class and capability is unique, and so too is the way in which ESG considerationsare integrated
Outcomes fed back for continuous integration
10Confidential | Ninety One
Case Study
Source: Bloomberg
Investors’ reaction to the Volkswagen Emissions saga
11Confidential | Ninety One
What to keep an eye on in the coming months
Source: Ninety One
- SFDR - Sustainable Finance Disclosure Regulation and EU Taxonomy
- TCFD - Taskforce for Climate Related Financial Disclosures
- UK Stewardship Code
- Increasing focus on net zero movements and alignments for asset owners and asset managers
Rules and regulations are increasing
12Confidential | Ninety One
Risk and Opportunity
Source: Financial Times, June 2020, Trustnet, September 2020
2020 was a strong year for ESG investing
13Confidential | Ninety One
Key takeaways
ESG is crucially important and part of your
Fiduciary duty as Board and Committee members
Encourage your managers to evidence ESG
integration. Watch out forgreenwashing
ESG factors present risk and opportunity
14
Disclaimer
All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only.
Ninety One Investment Platform is an authorised financial services provider.
Climate Change: A closer look
LGA Fundamentals Training
January 2021
The problem facing us all
The current pace of investment falls way short of meeting the 1.5°C scenario
17
Accelerated investment needed to stay within 2°C2100 Warming projections
Forecasts are inherently limited and are not a reliable indicator of future results.Source: Climate Action Tracker Project, 2017, *UN IPCC estimates, 2016 – 2035, thttps://www.climate-kic.org/news/no-more-excuses-financing-1-5c.
Glo
bal g
reen
hous
e ga
s em
issi
ons
GtC
O2e
/Yea
r
Historical
No Action =c.~5°C rise by 2100
Current policies c. 3.4 °C
1.5 °C by 2030 needs~ $2.4 trillion p.aInvestment (2016-2035)*
“The challenges currently posed by climate change pale in significance compared with whatmight come. . . the more we invest with foresight; the less we will regret in hindsight” Mark Carney, Governor of the Bank of England
18
The current pace of investment falls way short of meeting the 1.5°C scenarioRequires both private and public capital to meet the funding gap
Source: Climate Policy Initiative - Global Landscape of Climate Finance UN IPCC. November 2019.https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2019/
19
2020 was the third hottest year on record“Lockdown-related fall in emissions is just a tiny blip”
Source: World Meteorological Office, ERA5. Credit: Copernicus Climate Change Service/ECMWF
The drivers of decarbonisation
Regulation, Technology and Consumer Behaviour
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Regulation: 2020 – the year that “net-zero” policies went globalNew policy announcements across Asia countries and stronger commitments from Europe
Source: As at 31 December 2020. Goldman Sachs Global Investment Research, Emissions Data for Global Atmospheric Research. Based on 2018 global emissions estimates.
China, 30%
Japan, 3%
South Korea, 2%
EU-28, 9%
New Zealand, 0.1%
No Net Zero policies, 56%
of global emissions now covered by “net-zero” commitments
c.45%
New US administration appears encouraging too with Biden promising to re-join the Paris Climate Agreement
22
TechnologyCosts have fallen considerably as technologies have improved
Source: Bloomberg BNEF, 31st December 2019.
Levelized cost of energy (USD/MWh, nominal) – wind and solar
0
50
100
150
200
250
300
350
Dec
-09
Jun-
10D
ec-1
0Ju
n-11
Dec
-11
Jun-
12D
ec-1
2Ju
n-13
Dec
-13
Jun-
14D
ec-1
4Ju
n-15
Dec
-15
Jun-
16D
ec-1
6Ju
n-17
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-17
Jun-
18D
ec-1
8Ju
n-19
Dec
-19
USD
/MW
h
Offshore Wind Onshore Wind
Solar PV - No Tracking Solar PV - Tracking
Li-ion battery pack price and demand
1,400
1,200
1,000
800
600
400
200
0
2000 2012 2014 2016 2018 2020
700
600
500
400
300
200
100
0
$/kWh (2019 real)
18% learning rate
GWh
132
23
Consumer behaviours continuing to change EV/Hybrid sales overtook diesel sales in Europe in September for the first time
What does a solution look like?
25
What is a Carbon Footprint?
– Carbon footprint is the total climate change impact of all the greenhouse gases caused by an item or activity rolled into one and expressed in terms of the amount of carbon dioxide that would have the same impact (CO2e)
– Methane for example is 25x more potent per Kg than CO2
– Nitrous Oxide is about 300x more potent
– In the UK, the total impact on the climate is 86% CO2, 7% methane and 6% Nitrous Oxide
– The average person in the UK has an annual carbon footprint of around15 tonnes (emerging markets are lower and Americans are higher)
– Beware carbon toe prints!
– For example an online carbon calculator may calculate your carbon footprint based on your energy and travel but ignore all the goods you purchase, the same thing happens with companies and portfolios
Source: How Bad are Bananas? The Carbon Footprint of Everything by Mike Berners Lee, 2010.
CO2
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Fancy a cuppa?
Black tea (boiling only what you need) 21g
Tea or coffee with milk (boiling only what you need) 53g
Tea or coffee with milk (boiling double the water you need) 71g
A large cappuccino 235g
A large latte 340g
95% of the carbon footprint of the latte is the milk!
Source: How Bad are Bananas? The Carbon Footprint of Everything by Mike Berners Lee, 2010.
A large latte every day is almost 1% of your annual carbon footprint
27
Assess carbon risk.
Source: Ninety One, Urgentem, November 2018
Scope 1 carbon emissions are the direct emissions from owned or controlled sources
● Fuel burned on site
● Owned vehicles
Scope 2 carbon emissions are the indirect emissions from the generation of purchased energy
Purchased electricity, steam, heating and cooling for own use
Company vehiclesCompany facilities
1 2Scope 1Direct
Scope 2Indirect
What is a Scope 1 & 2 footprint?
28
Scope 3Indirect
Carbon risk
Assess carbon risk
Source: Ninety One, Urgentem, November 2018
There are 15 separate categories of scope 3 including3
1. Purchasedgoods and
services
9. Downstreamtransportation
and distribution
5. Wastegenerated inoperations
2.Capitalgoods
4. Upstreamtransportation
and distribution
6. Businesstravel
7. Employeecommuting
8. Upstreamleased assets
3. Fuel andenergy related
activities
10. Processingof sold products
12. End-of-lifetreatment of
sold products
13. Downstreamleased assets
14. Franchises 15. Investments11. Use ofsold products
7 relating to the emissions of the
products once they are sold/used
8 relating to the supply chain
What is a Scope 3 footprint?
29
Samsung versus Apple
FY20
10
FY20
12
FY20
14
FY20
16
FY20
18
15m
14m
13m
12m
11m
10m
9m
8m
7m
FY20
10
FY20
12
FY20
14
FY20
16
FY20
18
0.831m Total GHG Emissions
0.8m
0.7m
0.6m
0.5m
0.4m
0.3m
0.2m
15.173mTotal GHG Emissions
Scope 1 & 2 methodology massively favours outsourced manufacturing
Source: Bloomberg, November 2019. This is not a buy, sell or hold recommendation for any particular security. For further information on specific portfolio names, please see the Important information section.
30
Production 29g/km 57g/km
Use Phase 111g/km 2g/km (100% renewable)
Total 140g/km 59g/km
Favour carbon avoidedCarbon avoided compares products to the status quo
Source: Ninety One, Urgentem, Volkswagen as at April 2019
Standard small car – combustion engine
Total Carbon
avoided
81g/km
Status quo
Carbon efficient product
Small plug-in electric car
Carbon avoided is the carbon emissions avoided by using a product that has less carbon emissions than the status quo
thereby contributing to decarbonisation
31
Focus on companies exposed to environmental revenues
No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. This is not a recommendation to buy, sell or hold a particular security. For further information on specific portfolio names, please see the Important Information section.
Two stage screen:
1. Companies with at least 50% of their revenue from the sectors above. Companies with >5% revenues from oil, gas and coal excluded
2. Quantified carbon avoided
Renewable energySolar / Wind / Clean Power Utilities / Smart Grids / Networks
Resource efficiencyEnergy efficiency / Water and land efficiency
ElectrificationElectric and autonomous vehicles / industrial electrification / hydrogen economy
12
3
32
2020 was the third hottest year on record“Lockdown-related fall in emissions is just a tiny blip”
Source: World Meteorological Office, ERA5. Credit: Copernicus Climate Change Service/ECMWF
Thank you
Atul ShinhInvestment Director, Multi Asset
Joshua KriskinansManager, Institutional