10 March 2021
- There are lots of net zero commitments, but its not always clear what this means in practical terms.
- Interim targets are important in meeting these commitments, but this stuff is hard.
- Regulation helps set a minimum bar – pulling the stragglers along with the pioneers.
- Whilst this episode focuses more on regulatory requirements, we’ve spoken to Claire Jones about responsible investing and climate risk before.
- TCFD – Task Force for Climate-related Financial Disclosures – provides a structure for companies to report on managing climate risks.
- Compulsory for listed companies by 2025, larger pension funds this and next year (brought in by Pension Schemes Act), but for smaller pension schemes perhaps from 2024.
- PCRIG – Pensions Climate Risk Industry Group – guidance on complying with TCFD.
- This is not something the market will just “sort out”, and not all managers will focus seriously on climate risks without encouragement from their investors.
- Make sure you’re equipped to consider these issues effectively.
- You can’t delegate responsibility, but instead be clear on what practical actions are delegated to your investment managers.
- Climate risk needs to be part of an annual business plan.
- It is consistent with requirements of the UK Stewardship Code.
- Annual TCFD reporting will need to be published online in conjunction with a pension scheme’s report & accounts, with members notified via the annual benefit statement.
Strategy and risk management
- Understand the climate risk exposure in your portfolio of assets.
- Make changes where uncomfortable with these exposures – eg tilting away from carbon intensive companies or engaging with your manager to put pressure on companies to improve.
- A key component to understanding risk exposures is scenario analysis: understand how your assets, liabilities and pension scheme sponsor may fair in different future scenarios
- Scenario analysis is required at least every three years, starting with the analysis in the year regulations that first apply to a pension scheme.
- With this understanding, integrate climate risk into your overall risk management.
Metrics and targets
- Data issues shouldn’t stop you monitoring, and guidance helps with filling in the gaps, but data is also getting better all the time.
- Metrics generally focussed on carbon footprint and carbon intensity:
- Carbon footprint most widely used;
- Carbon intensity – as a big asset owner, the absolute measure matters, largest investors can make a big difference;
- Normalised measure: WACI – weighted average carbon intensity – this is helpful to spot concentrations of risk.
- Most important thing is to have a measure and use it.
- Schemes required to set at least three metrics, which are calculated annually: one absolute (eg total carbon emissions), one intensity-based (eg carbon footprint) and one additional climate related metric (eg proportion of assets invested in low carbon opportunities).
- Schemes must set at least one target for one of the metrics (non-binding) – which is reviewed annually.
- One thing to take away - Climate change is real, trustees have a fiduciary and legal responsibility to take it seriously.
- Most underappreciated thing about investing - you are entrusting capital to people, to make things happen in the world. As an investor you can use capital flows to make a positive contribution, as well as a financial one.
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