The £90.8bn Universities Superannuation Scheme’s carbon emissions output currently leaves the pension fund behind its new climate targets, according to its Task Force on Climate-related Financial Disclosures report.
TCFD rules came into place in April 2022, when it was made compulsory for some of the largest UK-registered companies and financial institutions to disclose climate-related financial information.
The USS’s report, published in July, recommended a reduction of emissions between 4.7 per cent and 6.1 per cent each year, noting that the scheme has been underperforming these climate recommendations by as much as 69 per cent.
However, the scheme has no obligation to follow the recommendations as outlined in its TCFD report, but in order to achieve its ambition to be “net zero” for carbon by 2050, these metrics provide a general outline.
We need real zero, and we need it much sooner than 2050. Not to aim at something much more ambitious than net zero 2050 is not to take the future seriously
Rupert Read, USS member
USS head of global equities Innes McKeand suggested that any criticism of underperformance was premature. “It’s unrealistic to expect us to have made much progress because we’ve only just made the announcement [of emissions goals],” he said.
But professor and author Rupert Read, a member of the USS, believed the scheme’s aim of achieving net zero by 2050 are “fairly standard, and not good enough”, on the basis that the ambitions are lacklustre in the face of a “climate and ecological ‘emergency’”.
“Academics have been becoming increasingly clear that the ‘net’ in net zero is a dangerous false, get-out-of-jail-free card,” he argued.
“We need real zero, and we need it much sooner than 2050. Not to aim at something much more ambitious than net zero 2050 is not to take the future seriously.”
‘An ambitious target’
According to the report, the scheme has put in place targets for companies in its investment portfolio, asking these to cut carbon emissions intensity by 25 per cent by 2025, and by 50 per cent by 2030. This would be relative to the USS’s 2019 baseline as outlined in its TCFD report published in that year.
Paul Lee, head of stewardship and sustainable investment strategy at Redington, said that the 2025 targets were “positive, but it’s certainly an ambitious target from where we are standing right now. It seems like a huge stretch”.
The scheme admitted that its 1.9 per cent annualised reduction in carbon intensity had underperformed its lower target by 60 per cent, falling short of its upper target by 69 per cent.
Lee said he was not “terribly surprised” by the report’s findings, but argued that the gaps in the current data meant these numbers should not be looked at as targets, but instead as “ambitions”.
“I would certainly not be saying this is a ‘bad’ report or a bad approach. I think all pension schemes are learning and wanting to move in the right direction. I think everyone knows they are not where they want to be,” he explained.
‘Dodgy’ data
The USS admitted in the report that it had “been unable to obtain or calculate carbon data” for all of its assets due to a lack of methodological consensus and data availability issues. Cash, foreign exchange contracts, mortgages, asset-backed securities, futures, options and swaps were excluded from emissions exposure calculations.
Lee argued that the data available is “pretty weak at the moment”. He said: “The gaps in what companies are reporting mean that what pension schemes can talk about is based on slightly dodgy foundations,” adding that schemes “don’t really know where the starting point is because the data just isn’t there”.
He argued that making TCFD disclosures compulsory given this lack of data “does seem a little like putting the cart before the horse”.
“The starting point more logically would be asking companies to report. But there is a logic in having the people at the top of the investment chain asking for this information — it will take a while for that demand to have its impact down the system. It is having an effect, but it just takes time,” Lee said.
The report also excluded emissions produced by sovereign debt. It said that “all point source emissions generated within [a country’s] borders” would be among the calculations when measuring emissions from sovereign debt. This would include the emissions of companies within the jurisdiction, as well as public sector and government-funded emissions.
The USS observed that this methodology resulted in “some odd outcomes”, such as sovereign debt accounting for 85 per cent of the its total emissions, thus skewing the data heavily.
“The carbon footprint of a government bond is typically of the order 10 times the size of your average equity,” McKeand said.
“There’s a lot of double counting, in that the carbon footprint of a government bond includes the carbon footprint of some of the equities.
“If we were to sell a sovereign bond, especially an emerging market sovereign bond, we might meet our target,” he continued.
“But we would not have solved any problems. We would have simply got it off our balance sheet and put it on somebody else’s — it would have made zero difference in the carbon footprint the world has.”
The report found that Scope 3 data, which measures the emissions an asset is indirectly responsible for, is “still poor”. The USS believes that more reporting in this area will come next year.
Lee stated that Scope 3 emissions are “conceptually difficult” to begin with, and the current data is “even worse than Scope 1 and 2 data”.
When asked if the improvement in data accuracy may cause a bleaker outlook, Lee noted “it’s entirely possible that as the data improves, things look worse. We just don’t know enough”.
A hopeful future?
The USS recognised that it has “an important role to play in influencing the organisations in which we invest to provide better climate-related disclosures and solutions”, the report stated.
“We think we have a responsibility as an engaged owner to encourage the companies we invest in to adapt towards a lower carbon future,” McKeand said, adding that broad divestment could pass ownership on to bad actors.
“We hold particular sway with UK stocks because we are the largest UK pension fund. We are highly focused on fiduciary duty and we think it’s highly possible to align fiduciary duty with an integration of climate investment processes,” he said.
In order to increase the speed of the transition, the USS introduced a “climate tilt” to its developed market equity portfolio. The tilt will affect £5bn in assets of its £90.8bn total.
The scheme claimed that the climate tilt will reduce Scope 1, 2 and 3 emissions by “at least 30 per cent from day one compared with the broad equity market”, followed by a further 7 per cent each year.
McKeand said the implementation of the climate tilt is a “serious indication of intent”.
The USS report also provided details on the scheme’s sustainable investments. As of March 2022, the scheme placed £1.9bn into wind farms as well as other green technologies. It also has a £500mn sustainable growth mandate.
The report expected future results to “overshoot and some years undershoot” the scheme’s current targets.
Schemes start to gather learnings from first TCFD reports
As the first group of UK schemes have completed their Task Force on Climate-related Financial Disclosures reports, they have been challenged by the long process, incomplete and inconsistent data, and lack of mandatory reporting from fund managers.
Cartwright’s senior investment consultant, Adam Gregory, noted: “It makes sense that reductions are ‘lumpy’, as companies adjust plans to investor demand and trustees adjust strategy if companies are being too slow to react.”
Lee explained that TCFD reporting is not merely about the projections and targets, but more about “changing behaviour and thinking about issues that the financial markets have tended to neglect”.
He added: “It is not going to be straightforward and anyone pretending that it is, is wrong. It is not going to be pretty, but it is going to be necessary.”
