More pension schemes are committing to net zero agendas than ever before, but reporting and analysing climate-related disclosure data is no easy task for trustees.
More than half (52 per cent) of insurers and 50 per cent of pension funds have committed to making their portfolios net zero by 2050, up 12 per cent from last year, according to a recent report from Aviva Investors.
The study found that the measurement and quality of reporting on environmental, social and governance issues is improving. Nevertheless, climate reporting is no easy feat, and addressing the necessary data and analytics needed for net zero status reporting is challenging for trustees.
Assuming the companies in the pension’s portfolio don’t already report their net zero status, trustees will need granular data to ensure net zero analysis is accurate
Gordon Tveito-Duncan, GaiaLens
Pension schemes do not have long to get climate reporting right. Occupational pension schemes with assets of more than £1bn, along with Financial Conduct Authority-regulated pension providers, must have all processes in place and be reporting in line with the Task Force on Climate-related Financial Disclosures by July 2023.
The TCFD does not explicitly commit schemes to net zero targets, but large pension funds aiming for net zero will have to meet its requirements. This is due to a recent TCFD update, which included guidance on disclosure for companies’ plans to transition to a net zero economy.
This included several measures, with greater clarity over “TCFD in-scope business”. Among other things, this covers total carbon emissions, carbon footprint and weighted average carbon intensity.
Gordon Tveito-Duncan, director and head of ESG technology at GaiaLens, says: “Assuming the companies in the pension’s portfolio don’t already report their net zero status, trustees will need granular data to ensure net zero analysis is accurate.
“In the case of greenhouse gas emissions reporting, for example, they will need Scope 1, 2 and 3, downstream and upstream and other criteria.”
This poses several challenges, according to Tveito-Duncan, who points to the large number of independently validated metrics required: “One of the most important is the reporting of Scope 3 for greenhouse gas emissions, which covers emissions from sources that are not owned and now directly controlled by the reporting company such as commuting to work and business trips.
“Experts say this generally makes up 12-15 per cent of organisations’ emissions in the services sector.”
He advises that trustees tackle their net zero analysis “as soon as possible”, as any adverse issues identified could take time to address.
Achieving net zero
Setting a net zero target and achieving it are two very different things. Jeffrey Mushens, technical policy director at The Investing and Saving Alliance, notes there are currently no agreed industry-wide disclosure standards for net zero.
Tisa is convening efforts to draft a guide to TCFD, including outlining how trustees and providers can meet their reporting obligations.
“This is not going to be straightforward, despite the regulators and government having published roadmaps — the actual physical disclosures are still in the consultation and planning stage,” Mushens says.
“The completion of this is needed and, indeed, eagerly awaited so that we can finalise our guidance and put the requisite measures in place well in advance of the deadline.”
Mushens believes that the greatest challenge facing trustees is product and portfolio-level disclosures, and that these professionals should already be in discussion with their portfolio managers and professional advisers on how to move forward.
Celene Lee, principal and senior investment consultant at Buck, says having an appropriate governance structure is key to properly managing climate risk, and ultimately to achieving net zero.
“This includes having clear roles and responsibilities, taking into account how frequently various metrics are measured, and assessing overall objectives,” she notes.
She adds that trustees need a realistic idea of what is essential to the process, how quickly it is possible to achieve net zero targets, and what steps can be taken to hit those targets sooner.
Meanwhile, Steve Goddard, chief executive at HS Sole Trustees, argues that pension funds should use their power to influence change at asset managers to move their schemes towards net zero, and in the process avoid greenwashing at all costs.
“A good trustee, and a number of members who are very hot on ESG and environmental issues, will see right through that. The trustees don’t want to be exposed to wishy-washy fudging,” he says.
Why it matters
Lee says it is important that trustees get to grips with climate disclosure data and analysis since climate-related regulations will lead to significant changes for businesses and capital markets.
Such rules have already influenced the price of energy, the way financial and non-financial resources are extracted, spent and deployed, and the speed of innovation.
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“All of these factors will have a fundamental and profound effect on asset prices and therefore on asset owners, and it is therefore vitally important for everyone to pay attention to the new rules of the game and ensure you can play well,” Lee adds.
Goddard points out that failure to meet imposed targets will reflect poorly on trustees.
“If you’re not active, up to speed, and delivering what some members expect, you’re bound to get members kicking off if you haven’t achieved [your climate targets],” he warns.
