In recent months, some of the country’s biggest pension schemes have begun to publish their first reports produced in line with new climate risk regulations.
Rules that came into force in October last year require pension schemes with £5bn or more in assets to measure the carbon intensity of their portfolios and set targets towards making them greener.
The publication of these so-called “TCFD” report cards should in theory help limit the financial risk to members’ pension pots from global warming, in line with Paris Agreement climate goals.
But how confident should members be about what’s being said in the first wave of reports? Not overly, according to some industry insiders. The problem is the data used to produce these first wave of reports was largely poor and patchy.
To meet their climate disclosure duties, trustees are reliant on asset managers to supply data about the carbon emissions related to specific investments.
But some of this data was not available, or of poor quality or inconsistent in presentation across managers.
Schemes with more complex portfolios, such as those holding private market assets, found it far harder to obtain data, leaving some advisers to rely on educated guesswork to plug information gaps.
Where there was data on emissions, there was the challenge of making things add up where different metrics or measures have been used.
Given these challenges, it is no surprise that many climate risk reports from some of the biggest company schemes in the UK have heavy caveats about data quality, or use euphemistic terms about how they expect the reports to ‘evolve’ as more data frees up.
This is not the most satisfactory of situations for members, who are paying for the reports and who should expect credible information from trustees.
This situation has largely come about for several reasons, primarily the government’s decision to press ahead with the new climate reporting obligations, even after being warned trustees wouldn’t have a great deal of reliable data to work with. This was not seen as a valid reason to delay.
Secondly, and extraordinarily, the TCFD regulations landed on the shoulders of big pension schemes before the same rules were having to be implemented by the corporate world and asset managers.
David Russell, head of responsible investment at USS, the UK’s largest private sector DB pension fund, which was one of the first schemes to produce TCFD reports, described this situation as “completely nuts” at a PLSA conference in May.
The result of a political push for the UK to be a global green pension beacon is TCFD reports that are full of good intentions but with many question marks over the veracity of their conclusions.
I hear you asking ‘why does this matter’? We have to start somewhere when it comes to reducing climate risk.
This matters because trustees are now faced with the less than ideal situation of having to sign off regulatory reports which cannot be independently verified because of data quality issues.
This matters as these reports were being prepared at the same time regulators are pursuing some asset managers for alleged greenwashing, or making false claims about the ESG credential of their funds.
No wonder some trustees are uncomfortable with what they are pushing out, and what they have to work with, going forward, as their climate disclosure duties continue. Some investment experts are now openly stating that the first wave of climate reports will need to be restated at some point.
If there is one consolation for trustees, it is that the regulator is taking a relaxed approach to the first wave of climate risk reports, in a nod to the data challenges they faced. It recently said it does not anticipate issuing any penalty notices to trustees of schemes that publish their first TCDF reports, in most circumstances, who have to work with the data available.
These challenges are expected to ease over time when more accurate and consistent climate data becomes available. But it does seem gobsmacking that potentially flawed reports can be served to members.
Meanwhile smaller schemes of more than £1bn in assets are in the process of preparing the same TCFD reports. Without the big budgets of the largest schemes, and human resources, these plans may struggle to come to meaningful conclusions on how they will measure and manage climate-related risks and opportunities.
Make no mistake, the fund management industry needs to do a lot more – and do it a lot better – in terms of supplying climate risk data on the companies and assets they manage. But this is not going to happen overnight.
Until the gaps in green data are plugged, and accuracy is improved, don’t expect too many trustees to be crowing to their members about being world leaders in climate reporting.