Schemes start to gather learnings from first TCFD reports

Speaking at the Pensions and Lifetime Savings Association’s investment conference in May, David Russell, head of responsible investment at the £90bn Universities Superannuation Scheme, detailed that the pension fund is still in the process of producing its TCFD report, which will go out with its annual report in July.

Russell explained that a team was built for specifically producing this report, bringing together members from the responsible investment, legal, company secretary and asset allocation departments. “It is not an easy task to go through,” he noted.

Additionally, parts of the TCFD report will be included in the USS scheme’s annual report, meaning that it will be audited, which adds to the complexity and cost of the procedure.

Where are we supposed to get the data if our fund managers aren’t producing these reports? It is completely nuts

David Russell, USS

Helping smaller schemes

While smaller schemes with £1bn to £5bn of assets are not expected to comply with TCFD reporting from October 1 2022 onwards, they may learn lessons from larger schemes that are worth more than £5bn as they complete their first reports.

Russell said a lot of different people were involved in the reporting procedure from different parts of the organisation. The USS is bigger than most schemes, meaning it also has more resources.

He said other schemes will have to think about how they will resource this process and ensure they are complying with all the different requirements of the regulation.

Paul Lee, head of stewardship and sustainable investment strategy at investment consultancy Redington, argued that the industry needs to encourage the authorities to think about ways in which the reporting process can be streamlined. “It is a cost burden,” he said.

Russell agreed, and said he hopes that the Department for Work and Pensions and the Pensions Regulator will learn from the experience of larger schemes that have gone through the process, and “hopefully come with something that is a bit less burdensome for smaller schemes and [make] some kind of amendment to the regulations”.

Poor and patchy data

Lee said it is “extraordinary” that TCFD regulations landed on the shoulders of the investment industry before having to be implemented by the corporate world.

While TCFD rules came into force in October 2021 for larger schemes with assets worth more than £5bn, the Financial Conduct Authority set up a timeline for assets managers with more than £50bn in assets under management and providers that have more than £25bn to comply with regulations from January 2022, with a publication deadline of June 30 2023.

As a result, Lee noted that the “quality of information, the data that you can get out of your investments is really poor and really patchy. This means that there are holes in what comes through the system — you have to interpolate to fill those holes. That drives all sorts of challenges just in and of itself”.

He hopes that this would change over time, as more corporations begin to disclose climate-related financial information. However, he added that it would take a “couple of years” for the investment industry to get to where it needs to be in terms of providing climate-related data that are accurate, complete and consistent.

Russell argued that it is currently not mandatory for fund managers to report. “Where are we supposed to get the data if our fund managers aren’t producing these reports? It is completely nuts,” he said.

He added that “even the way of calculating some of the data is odd”. For example, the scheme found its sovereign debt carbon footprint to be by far the largest. This is due to the way the data of this asset class is calculated on an all-country emissions basis.

Russell added there is a large amount of double counting, to the point where the scheme is reporting its sovereign debt footprint separately from all other asset classes.

He said: “The data is poor, and the processes for counting them are poor. But the key point is, it doesn’t mean we shouldn’t be doing something about it. Things will change a lot as the data gets better. We have a role to play in that. We should be asking our fund managers to make sure that they are collecting the data.”

Lee argued that the fund management industry needs “to do a lot more and a lot better” on this. Fund managers need to challenge the companies in which they invest to make progress over time, he added.

Delivering real change

Russell noted that the easiest way to reduce the USS scheme’s carbon footprint is to sell its exposure to emerging market debt, as it has by far the highest level of carbon emissions in the portfolio. However, he asked if this is what the scheme wants to do: “Surely we should be using our capital to drive transition in these countries, rather than denying them the funding they may need to transition?”

He said that this shows it is a complex discussion. It is not just about selling holdings to reduce your footprint — that is easy, but it makes zero difference to reducing emissions.

“What we should be doing is using our capital to encourage companies, governments, issuers of debt to transition rather than just sell,” he noted.

Lee added: “It is really important not to get caught up in the mindset that this is a compliance report. The value that comes from this is the conversations that it drives around doing more in relation to climate.”

In his experience, there has been real value in the thought process around TCFD reporting and it has helped schemes to more actively address the climate challenge.

It has helped some schemes start to think not only about net zero, but also their general approach to climate, and how they may move to address it and challenge their managers more for delivery against it.

This article first appeared on MandateWire.com