Maggie Williams looks at how schemes can improve their climate reporting, to members as well as to the regulator.
As climate change and ESG stewardship become a central part of pension schemes’ investment strategy, identifying suitable performance measures and devising frameworks to report on them has also risen in importance.
The Pensions Regulator and Department for Work and Pensions now requires schemes to use the Task Force on Climate-Related Disclosures framework (TCFD) to report on their portfolios – and from April 2022, large companies in the UK will also be subject to mandatory climate risk reporting, based on TCFD.
Although some local government schemes have already begun to report against the TCFD framework, the government is expected to release a consultation in the summer on future action.
However, the process of TCFD-related reporting can be time-consuming and complex for schemes, especially in the first instance. The output also isn’t particularly member-friendly, so schemes may need to create further reports to meet members’ as well as TPR’s needs.
TCFD reporting has been a part of Border to Coast Pensions Partnership’s reporting since it was set up in 2018, as a result of LGPS pooling. “Don’t underestimate how much time your first report will take and the input you need from across your organisation to cover the four pillars or strategy, governance, risk management and metrics,” cautions Jane Firth, head of responsible investment at Border to Coast. “It also led us to some important in-depth discussions within Border to Coast around metrics, including how we analyse our carbon footprint and understand the results.”
Having access to all the data needed for TCFD reporting is a challenge across all sizes and types of pension scheme. However, Victoria Barron, head of sustainable investment, BT Pension Scheme, points out that “There is a concern that if you don’t have information or can’t complete all of the steps, you have done something wrong, but that isn’t always the case. The regulation from TPR and DWP says that trustees should carry out activities ‘as far as you are able’. We have to accept that we won’t have everything at the start, and that things will change over time. It’s important to keep working towards this with fund managers.”
For example, Barron says that reporting on sovereign debt is difficult. “The way to measure emissions is still undecided, so you might need to state numbers in one way, then state them differently the next year.”
Brian Henderson, partner and director of consulting at Mercer, adds: “One trick I’ve learned is to get data from different sources. For example, we’ve worked closely with the custodians of some schemes. They are in a good place to help as they will have access to funds’ underlying stock lists. But you will still find that you have information missing. And, you have to accept that you’ll need to be flexible and may need to change your approach, including targets, in subsequent years.”
“Some data is two years out of date, but we need as far as possible to make decisions on the future. We use Transition Pathway Initiative tools and benchmarking indicators to help us understand what people are planning to do in the future,” says Firth.
“Net zero has caught trustees’ attention, and as part of our net zero goal, we are doing annual deep dives with trustees on key items, delivered by external information providers” says Barron. These include trustee obligations, policy and carbon metrics. “It’s tempting to panic because you don’t know everything immediately. Keep going and keep learning. Reach out, as there are lots of resources that trustees can use – but start learning as soon as possible.”
“My top tip would be to train as you go along, and don’t do it all at the start,” adds Henderson. “Put things into bite size chunks, as you’ll get a better outcome.”
From a LGPS perspective, Firth says that Border to Coast continuously supports its partner funds with responsible investment, including quarterly sessions with officers, and training sessions for pension committees. “We’ve been covering bite-sized pieces on TCFD and workshops looking at metrics in particular, ongoing training with committees and one-to-ones with the chair and vice-chair.”
In addition to training, trustees can also learn from other sources. “Small schemes can also start by exploring examples of what other TCFD reports look like and work with their external managers and consultants – they are there to help you,” says Firth. “They will have big teams working on climate change reporting, so get as much help from them as you can.”
The PLSA, Association of British Insurers and Investment Association have also developed a template for managers to report on TCFD data which is designed to help schemes collect data (see boxout).
Making reporting accessible for members and stakeholders
Engaging members with pensions investment strategies is difficult at any time, and although TCFD reporting creates a wealth of information, it isn’t easy for members to understand or digest. “People want to know what you are doing and how you are helping climate change – but beyond this the engagement will mostly be with people who are more carefully focused on climate change only. Most members are not interested in the level of detail created by TCFD, especially as part of an annual report,” says Barron. “But you do need to show that trustees are doing the thinking on this, consider what members care about, how it is being overseen and instil confidence that we are doing the right thing. We might give case studies and examples of how the scheme is engaging with its fund managers to support that. However, the majority of TCFD information will be for the regulator.”
“Border and Coast has a lot of scrutiny from stakeholders and lobbying groups,” says Firth. “A challenge for us is that we have to produce many different reports and there are a lot of different areas to report on, especially if you have committed to net zero goals as well. To make them all engaging and not too technical is a real challenge.” Firth suggests that more collaboration from regulators would help funds to manage reporting requirements “so we don’t spend too long producing reports and can get on with active stewardship.”
From the Pensions Minister, Guy Opperman MP, to activist groups and awareness-raising organisations such as Make My Money Matter, there is a lot of pressure for pension funds to show that they are actively addressing climate change, “But what really matters is that we take action on the back of the data,” concludes Henderson. “That is what will capture people’s imagination, rather than the reports themselves.”
PLSA resources to support climate change reporting
Carbon Emissions Template
A Joint PLSA/ABI/IA Working Group developed the Carbon Emissions Template (CET) to help pension schemes meet their obligations under the Climate Change Governance and Reporting Regulations, and associated DWP Statutory Guidance, and to help insurers and investment managers fulfil their obligations under the FCA’s new ESG Sourcebook as set out in PS21/24.
Towards a Greener Future – Case studies from the pensions sector
Pension funds set out their experiences of how they’ve set targets and overcome challenges in transitioning to a greener portfolio. They also offer advice for others who are facing the same challenges – including net zero transitions, producing the first TCFD report, and the important role engagement plays in protecting investments.
ESG Made Simple
This guide, produced in partnership with Aegon Asset Management, explains ESG as an investment concept and shows how it can be integrated into the investment strategy and oversight of pension schemes. It includes a glossary of relevant terms, highlights key ESG-promoting organisations and suggests a template for pension schemes to help them create their own ESG policy.