23 September 2021
Recent LCP analysis revealed that an estimated half of UK institutional investors have “significant” climate risks in their portfolios. To help clients manage and stay on top of climate risks as the UK and other countries transition to a low carbon economy, and after making their own Net Zero commitment, LCP are rolling out a range of initiatives to help safeguard clients and put them in the best position for the challenges and opportunities ahead.
LCP have also signed up to the Net Zero Investment Consultants Initiative (NZICI) which commits the firm to integrating advice on net zero alignment into their investment consulting services, reduce their own emissions, and engage with regulators and the industry to break down any barriers to a net zero future.
LCP will require investment managers to have joined the Net Zero Asset Managers Initiative by 1st April 2022 to be eligible for an LCP “buy” rating. LCP regard this as a minimum standard to ensure that the systemic financial risks from climate change are being addressed. They expect managers to go beyond this by proactively managing climate-related risks to their clients’ portfolios over both the short- and long-term.
In particular, managers demonstrating best practice will be expected to seek real world reductions in emissions through effective voting and engagement, rather than (just) focusing on reductions in portfolio emissions. This is because reaching net zero emissions across the global economy is vital for protecting investment portfolios over the long term. To help tackle the issues of transparency and green-washing, managers will be expected to publish and adhere to specific climate action plans for meeting the commitments made. LCP will continue to incorporate an assessment of an investment manager’s approach to dealing with climate change risk and exploiting opportunities in their advice to clients on manager selection and retention across all asset classes.
These requirements for investment managers follow other LCP initiatives to help institutional investors to manage their climate risk exposure:
- LCP have developed expertise in low carbon funds, having recently collaborated with LGIM on the design of a climate-tilted index equity strategy, which seeks to significantly reduce its exposure to carbon emissions in alignment with 2050 net zero goals. Over £5bn from LCP clients has already been invested in low carbon equity funds, with a further £2.5bn considering investing in them.
- They completed extensive research on how investment managers could incorporate climate-related criteria into buy and maintain credit mandates, and are now implementing client mandates totalling around £8bn.
LCP have been building their expertise in climate change for over a decade and made it an integral part of their investment consultancy services. They have today published a summary of their climate change approach and expertise, to help clients understand and assess LCP’s climate credentials. Their recent resources available to investors include:
- Tip of the Iceberg report- provides a comprehensive climate risk profiling of a large dataset of UK institutional investors and revealed that half of UK institutional investors have significant climate risks in their portfolios which could be better managed.
- Aligning the Stars report - highlights £350bn investment opportunities in the UK energy market arising from the Government’s net zero by 2050 target, arguing that there is huge untapped investment potential if the energy industry thinks differently about the infrastructure assets required
- Climate Centre for Pension Trustees- hosts a wealth of easy-to-access information and links to LCP’s latest climate thinking. The full version, which is available to clients, also includes guidance and resources on ten specific areas of climate action.
Clay Lambiotte, Head of Investment at LCP said “The evidence is fast accumulating on the importance of achieving the goals of the Paris Agreement on climate change for our clients, their beneficiaries, and society overall. The recent UN IPCC report makes it clear this is crunch time for action.
“Alongside our work with investment managers and focus on low carbon solutions, we will be launching a range of tools and analysis to support our clients with meeting the challenges, and identifying the opportunities, of climate change requirements. COP26 is sure to highlight the once in a generation flow of capital required to achieve the transition to a low carbon economy, and we need to make sure our clients, and the industry overall, understands the risks and makes the most of any opportunities.”
Claire Jones, Head of Responsible Investment at LCP, added: “Asset owners and their advisers need to have the necessary skills and resources to address climate-related risks and opportunities for their investments. This is especially true for pension schemes subject to the TCFD requirements, as it forms part of their statutory guidance. To demonstrate to our clients that we have these skills and resources, we have published details of our climate credentials. We recognise that we are on a journey, so welcome our clients’ feedback on how we are doing and what else we should be doing to develop and enhance our climate-related services.”