New government-mandated reports are failing to provide “meaningful comparisons” when it comes to understanding how pension schemes are reducing carbon emissions and addressing climate change.
Pension schemes with assets of over £5bn and all authorised master trusts are required to publish Taskforce for Climate-Related Financial Disclosures (TCFD) reports, which contains a range of metrics on carbon emissions, alongside analysis on how portfolios will be impacted in different temperature rise scenarios.
But an industry review of the TCFD reports published by 14 leading master trusts concludes that the metrics provided on the carbon intensity of schemes are “not reliable” and the “plethora of methodologies used in the scenarios analysis makes comparability between schemes almost impossible”.
The review by the DC Investment Forum (DCIF) says: “Making comparisons between schemes of the metrics and scenarios is very difficult. It is not possible to use TCFD reporting in its current state to answer who is doing ‘better’ or ‘worse’ on climate change.”
As a result it says it is unclear who currently benefits from these often extensive public reports, and who they are primarily aimed at. The DCIF points out that in most cases the length and complexity of these report meant that are unlikely to be widely read by membesr.
But it also adds that the lack of comparability means they may be of limited use to consultants, advisers and employers as a tool that shapes decision making at the scheme selection level.
The DCIF adds: “It is unclear who benefits from publishing these reports, and who the reader should be. Much resource has been spent on them; schemes, consultants and asset managers will have been pulled away from other issues, including acting on climate change.”
The report adds that it is clear that these various TCFD report have been written with different purposes in mind: “From those who see it as ticking a regulatory box to those who see it as a showpiece document.”
As a result of this review the DCIF is calling for a number of industry-wide changes, particularly to do with the standardisation of metrics used and the methodologies.
It says the current range of metrics used to reflect the carbon intensity of a scheme are confusing, with different schemes using different measures. It adds that even when the same metric is used, direct comparisons can prove difficult.
The DCIF says: “Partly this is because asset classes have such wide difference in carbon intensity, with equites the lowest and short-dated corporate bond potentially 35 times higher.” This is a point that was brought out in Corporate Adviser’s review of TCFD reports, as part of its annual report into ESG reporting in DC workplace pension schemes.
The DCIF points out that such a huge disparity calls into question how meaningful these figures are.
Its review shows all schemes provided a figure for the absolute emissions measures, weighted by the Enterprise Value Including Cash (EVIC). However the DCIF said many schemes discussed the problem of mapping EVIC onto sovereign debt holdings – so these holdings were often excluded from this measure.
TPR guidance also recommends a footprint measure, which is a measure of the emissions financed per £1m invested, but also highlights schemes might also want to provide the Weighted-Average Carbon Intensity (WACI) figure .There are a range of factors that might provide the weighting but the DCF says most commonly this is the revenue of the companies invested in.
Of the schemes reviewed, 11 provided one emissions intensity measure, with two (Crystal and NPT) using the WACI figure. Three schemes provided both a WACI and carbon footprint figure, with six schemes providing just the carbon footprint measure.
DCIF points out that this situation is further complicated by the fact that some schemes – for example Nest and LifeSight, did not disclose an aggregate carbon footprint figure. Nest discloses an intensity figure for each individual asset class, LifeSight has cerated an emissions intensity index to track their reduction of this measure but does not disclose its intensity.
The DCIF also highlights the huge disparity in the carbon footprint for different asset classes, with equities having an average footprint of 85 tonnes CO2e/£m, while short-dated investment grade bonds having a footprint of 2,983 tonnes CO2e/£m.
It says: “For short paper (ie cash) to have a carbon footprint 35 times greater than equities suggest these figures may not be meaningful to begin with. Members would struggle to understand why this could be the case, whatever the technical explanation. Because equities have the lowest assessed footprint, any portfolio offering reasonable diversification will look to be worse in terms.”
It adds that this situation is “unsatisfactory” and calls on the industry to work together to come up with “common disclosures of current emissions incorporating views on how different asset classes, data gaps and carbon offsetting should be approached quickly.”
When it comes to climate scenario analysis, it says there are again significant differences relating to the time horizon used, use of example members, emissions scenarios and methodology of calculating impacts – again make comparability between schemes almost impossible. As a result it says impacts ranged from the pessimistic (TPP – estimating a 50 per cent damage to equities in a 3°C temperature rise scenario) to the more optimistic (NOW predicting 2 per cent uplift to pots in a 3°C scenario).
Nico Aspinall, author of the research, says: “Putting the responsibility to address climate change on trustee boards has been positive and has achieved much in terms of starting schemes upon the route of addressing climate change.
“However, creating the requirement to disclose the outputs of TCFD processes without a consistent template for reporting to be used across the industry highlights the complexity and confusion the financial services sector feels in terms of how it should be acting on climate risk.”
Lorna Kennedy, chair of the DCIF, added: “TCFD reporting has been a new challenge that the pensions industry has grasped admirably. But to make all the time spent on these reports worthwhile, more industry reflection is needed. We need to work together to make sure that these reports are more readily comparable, in order to get a clearer picture of how schemes are managing climate risk.”
