Industry suggests improvements to climate reporting requirements

The DWP’s consultation, which was launched in October and closed on Thursday, proposes that trustees be compelled to report on a new “portfolio alignment” metric, designed to inform scheme members of the extent to which their portfolios are aligned with Paris Agreement targets.

The portfolio alignment metric would be put “on a statutory footing”, the consultation explained, as a fourth metric to be included in schemes’ Task Force on Climate-related Financial Disclosures reports.

It set out three approaches by which schemes can satisfy the new requirement. The first is called a “binary target measurement”, which considers “the alignment of a portfolio with a given climate outcome based on the percentage of investments or counterparties in that portfolio that (a) have declared net-zero/Paris-alignment targets, and (b) are already net zero/Paris aligned”.

We feel greater attention on adaptation and physical risk is required, in alignment with the programme set out in the Glasgow pact to advance the global goal on adaptation

Cadi Thomas, Isio

The second is “benchmark divergence models”, which assess portfolio alignment by comparing forecast emissions performance against one or more benchmarks; while the third is “implied temperature models”, which measure the consequences of portfolio alignment (or misalignment) and gives it a “temperature score”.

“We are keen to provide trustees with complete methodological flexibility in our proposed measures given that the market has not yet coalesced around a single approach, and methodological standardisation is yet to emerge,” the consultation stated.

Cadi Thomas, head of environmental, social and governance research at Isio, welcomed the “step-wise change in thinking for pension schemes”, which calls for trustees “to measure and report against efforts to limit the global average temperature increase to 1.5C using the portfolio alignment metric”.

“However, we note that the current focus remains on decarbonisation and transition risk. We feel greater attention on adaptation and physical risk is required, in alignment with the programme set out in the Glasgow pact to advance the global goal on adaptation,” she said.

“Given this is the missing piece of the puzzle in an industry-wide response to climate change, any evolutions in TCFD guidance could consider turning their attention to physical resilience.”

Less is more

In its response to the consultation, the Association of Consulting Actuaries said it was supportive of the overall aims, but stressed that they could be better achieved by requiring less reporting detail, not more.

With regard to climate reporting, though the new mandatory portfolio alignment metric was welcomed, the ACA recommended that other, additional metrics be downgraded from “must” to “should”.

It also recommended that the DWP begins with an interim provision under which schemes within scope from October this year can choose to report a portfolio alignment metric, and/or an additional metric, in their TCFD report for the scheme year ending after October 1 2021, with the requirement to report against four metrics only coming in for the scheme year ending October 2023.

This was in part a response to the several large schemes that fell in scope in October last year, and which requested a deferral on the reporting of a fourth metric.

With regard to the implementation statement, the ACA was cautious about the expected level of detail required by the guidance when reporting significant votes. 

Stewart Hastie, who leads the ACA’s Climate Risk Group, said: “We support the introduction of a new mandatory portfolio alignment metric as an informative and important tool for pension trustees in managing forward-looking climate risks compared with the backwards-looking, emissions-based metrics.

“However, the guidance should emphasise the importance of the actions being taken within the underlying assets to decarbonise, rather than just whether a long-term net zero target has been announced.

“We also recommend that the calculation and disclosure of the other additional metrics could now fall under the ‘should’ criteria, rather than ‘must’.”

Vanessa Hodge, who leads the ACA’s Investment Committee, added: “The intention for the implementation statement to provide clearer information to members of pension schemes, rather than be seen primarily as a compliance report, is to be welcomed. We certainly see the value, to members in particular, in the implementation statement being more focused and less detailed.

“Linked to this, the government needs to rethink the guidance around the level of disclosure required in the implementation statement when reporting on significant votes.”