Master trusts: TCFD reports 'almost impossible' to compare

A report by the DC Investment Forum (DCIF) analysed 14 DC master trust Taskforce for Climate-related Financial Disclosures (TCFD) reports; master trusts have been required to publish TCFD reports since 2022 to report on their progress in managing climate risk on behalf of their millions of members.

The report, which is the second in a two-part DCIF series, found that making a comparison between the reports in terms of which master trust was doing better or worse at managing climate risk was "almost impossible".

Author Nico Aspinall questions whether the master trust industry was clear on the intended reader of the reports. He said making comparisons between schemes was very difficult and it was not possible either to compare the current levels of emissions nor the projected impacts between schemes.

The DCIF said: "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. TCFD reports 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."

The report also questioned the efficacy of emissions reporting, which "varies due to methodology, data provider, inclusion of scope 3 (indirect, supply chain) emissions, and different approaches to calculating intensity measures".

Some fundamental concerns over the methodology are raised by the DCIF report which found that the lower the equity content of a portfolio, the higher the reported emissions. "This will not make sense for the average saver," it said.

Climate change scenarios

For climate scenario analysis, differences in time horizon, use of example members, emissions scenarios and methodology of calculating impacts again make comparability between schemes almost impossible.

Impacts ranged from the pessimistic, for example one master trust predicted 50 per cent damage to equities in a 3°C scenario, while another predicted a two per cent uplift to pots in a 3°C scenario.

TCFD reports could benefit from greater standardisation so that it’s possible to compare like with like. In particular, the regulator should set out a common methodology for climate scenario analysis.

It would be useful for regulators to clarify the intended audience of TCFD reports, so that schemes better understand the audience to whom they are writing. 

Climate risk and regulation

Nico Aspinall, author of the research, said: “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, said: “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.”