LCP welcome transition plans but urge Government to focus on real world action and keep reporting proportionate

LCP are calling on the UK Government to make any climate-related transition reporting requirements clear, concise and relevant for pension schemes, and to ensure they encourage actions that are expected to translate into real-world reductions in climate risk.

LCP have responded to the consultation from the Department for Energy Security and Net Zero (DESNZ) about implementation routes for UK companies and financial institutions to develop, publish and implement credible climate transition plans.

LCP welcome the Government’s plans to introduce transition planning as they believe it has the potential to accelerate decarbonisation across the UK economy and better enable capital allocation that supports a net zero and climate-resilient economy. This will help pension schemes meet their long-term investment objectives by helping to protect financial markets from potential instability or significant loss of value due to the physical impacts of climate change.

LCP have highlighted that pension schemes are heavily reliant on investment managers to be able to develop and implement their own climate transition plans. It is therefore important that any transition plan requirements cover UK-regulated investment managers, ensuring they produce transition plans that will help pension schemes understand whether and how the managers plan to align the assets they manage with the Paris Agreement goals. In turn, investment managers will be reliant on company transition plans to support their investment decisions and engagement with companies. LCP believe that, as well as introducing transition plan requirements for economically-significant UK companies, the UK government should encourage global adoption of consistent requirements given that pension schemes’ assets are invested globally.

If transition plan requirements are introduced for pension schemes, LCP believe these should be targeted at schemes with the greatest exposure to climate risk and capacity to influence the transition — such as DC master trusts, DB consolidators, local government pension schemes, and larger own-trust schemes. They are calling for the plans to remain proportionate and be combined with existing climate reporting, without increasing the overall reporting burden. They should build on learnings from the existing climate reporting requirements for pension schemes and focus on the aspects more likely to be effective at delivering better outcomes for members.

Other issues that LCP raise in their consultation response are:

• Government support for the transition is needed across the UK economy, including clear policy frameworks and sector-specific pathways.
• Transition plans should be outward looking, focusing not only on how an organisation can protect itself from climate risks but also how it’s contributing to the broader economy-wide transition and how well its actions align with a net zero pathway.
• LCP recommends principle-based requirements for pension schemes, supplemented by guidance developed by industry groups, to encourage meaningful action rather than box-ticking.
• The key challenges for preparing pension scheme transition plans include data gaps, fiduciary duty constraints, and reliance on third-party managers.

Claire Jones, Partner, Responsible Investment, LCP, commented:

“We support the government mandating the publication of credible transition plans by significant UK entities, given the critical importance to investors of decarbonising the economy and managing systemic climate-related risks. At the moment, there isn’t enough being done to plan for the future when it comes to climate risk and these plans would be a step in the right direction.

“Strengthening the link between planning and delivery is essential to ensure that climate commitments translate into real-world outcomes. The key benefit of mandating implementation is that it increases the likelihood that transition plans will translate into real-world reductions in climate risk. This could also promote accountability and credibility, ensuring that plans are not just prepared and published, but actively delivered. However, if implementation of transition plans is mandated, the focus should be on whether the entity is undertaking the actions set out in its plan rather than whether the entity is achieving its targets, since the outcomes of some targets will depend on factors outside the entity’s control.”