The Transport for London Pension Fund plans to look into ways of analysing its carbon exposure following a member request, as experts stress that schemes need to understand exactly what they are measuring and what further steps they can take.
As long-term investors, pension funds are often asked to consider risks related to climate change as the world seeks solutions to slow down the impact of harmful emissions on the environment.
If you’re just looking at the company's emissions, that only tells part of the story, and it doesn’t really tell you what their exposure to risk is
Andie Stephens, Carbon Trust
In the final quarter of 2016, the £8.2bn TfL Pension Fund was urged by one of its members to “take steps to measure the exposure of its portfolio to climate risks”.
Carrying out a carbon audit
The member suggested that one way of doing this would be to undertake an “inexpensive” carbon audit.
This would “identify the scheme’s exposure to carbon emissions, coal power production, stranded assets, divestment targets, energy transition pathways and water dependency, as well as quantifying the positive environmental impact of investments across all asset classes”, the member explained.
Currently, the scheme takes account of a number of responsible investment factors: it is a signatory of the Carbon Disclosure Project and said it takes part in ‘green’ investing where this can be financially justified. This includes a £100m allocation to a renewables fund invested in 22 wind and 13 solar projects across the UK.
A spokesperson for TfL said that the pension fund’s investment committee “will be considering how it can gain a better insight into its carbon exposure during the course of this year”.
Source: TfL Pension Fund
If approved, this will add to recent initiatives on environmental, social and governance issues, including signing up to the UN Principles for Responsible Investment, the spokesperson added.
Increased interest in environmental issues
The number of schemes seeking to measure their carbon footprint as part of their fiduciary duty to consider climate change “has really ramped up”, said Richard Mattison, chief executive at environmental consultancy Trucost.
This has been particularly noticeable since the Paris climate negotiations in 2015, he said.
In addition, in December 2016 the Financial Stability Board published a report detailing recommendations on climate-related financial disclosures for all sectors, including public and corporate pension funds.
This has also contributed towards “quite a shift in the behaviour of pension funds, and especially among public pension funds in the UK”, Mattison said.
He said one difficulty for pension funds when it comes to impact investing is the fact that “getting rid of coal stocks from your portfolio and replacing them with wind stocks, or solar stocks” is like “replacing an apple with an orange”, because of their different return and volatility characteristics.
On the other hand, measuring a scheme’s carbon footprint “is a very inexpensive exercise” and “a very easy thing to do”, Mattison added.
Know what you are measuring
However, Scott Thompson, director at sustainable investment management company Impax Asset Management, said he does not think that carbon footprinting “is particularly useful” when trying to understand what the pension fund risk is for members.
For Thompson, carbon footprinting is a good place to start, but he said “all it tells you is how much carbon [a company emits]”, whether directly or indirectly. When looking for something meaningful, he added, it is useful to actively search for environmental solution providers.
Andie Stephens, associate director at advisory the Carbon Trust, said: “If you’re just looking at the company’s emissions, that only tells part of the story, and it doesn’t really tell you what their exposure to risk is.”
He added: “You need to understand what it is you’re measuring.” For example, when analysing at an oil and gas company, the most obvious emissions are caused by drilling, pumping and transporting. Then there are the indirect emissions from the company’s consumption of purchased electricity or other sources of energy.
But Stephens said it is also important to take account of other indirect greenhouse gas emissions that are the consequence of the operations of certain organisations, but are not directly owned or controlled by that company.
