This Impact Lens research paper shares insights on how pension funds use the output from their Task Force on Climate-related Financial Disclosures (TCFD) reports, what challenges they face and which metrics they favour.
GOVERNANCE
- Pension funds gather data for their report from three main sources:
- Low-cost solution – ask your investment manager.
- Data integrity option – ask a data specialist (for example, Trucost or MSCI).
- Data with interpretation – ask your investment consultant.
Insight: most funds are using their investment consultant.
STRATEGY
Investment strategy
- Concern from funds about using TCFD report output to influence their investment strategy because:
- Data is still unreliable,
- Reporting is still in its infancy – need trend data.
- Does the fund want to green the world or the fund?
Insight: most funds are not yet using their reports to inform and drive strategy.
Carbon offsets
- Only a minority of pension funds mentioned offsets in their reports, with only one accounting for it.
- The credibility of carbon offsets was questioned.
Insight: most funds are not yet including carbon offsets in their TCFD reports.
Scenario analysis
- A valuable tool but some scepticism - main use was to identify biggest risks.
- 75% of funds interviewed referenced liabilities in their scenario analyses.
- Questions over the validity of assumptions.
Insight: most funds see scenario analysis as useful but with a limited application at present.
RISK MANAGEMENT
Material risks
- Several funds mentioned concerns about the materiality of risks.
- Time spent analysing climate risk was disproportionate to mitigation efforts.
Insight: TCFD reporting fails if it becomes overly complicated.
Estimations or omissions
- Mixed views about whether it is better to estimate or omit data.
- Disagreement over whether to use scope 1, 2 and 3.
- Embarking on the journey, even if imperfect, is valuable.
Insight: data quality remains a key challenge for pension funds.
Assurance
- Most schemes felt data was too inadequate to warrant independent assurance.
- A focus on data assurance of the provider may be necessary, however.
Insight: independent assurance is needed but unsuitable today given data limitations.
METRICS AND TARGETS
Metrics
- Data lacks consistency.
- Conflicted views on scope 3.
- Concern over unintended results.
Insight: climate data remains a challenge for pension funds.
Science-based targets versus implied temperature rise
- Science-based targets (SBTs) – positives
- Focuses on the medium- and long-term outcomes.
- Validation by climate experts reassuring.
- Less time consuming to calculate. Climate data remains a challenge for pension funds.
- Science-based targets (SBTs) – negatives
- Speed of data dependent on SBTi’s resources.
- Implied temperature rise (ITR) – positives
- Allows for investment in opportunities as well as mitigation.
- Engaging and accessible for members.
- Implied temperature rise (ITR) – negatives
- No standardisation in methodology.
- More difficult to compare between pension funds.
MEMBER ENGAGEMENT
- Mixed views.
- Some funds add a more accessible summary to the first two to three pages of their report to make it more
- member friendly.
- Unsure if members are downloading the report.
- Most funds use other forms of outreach; for example, taking output from the report and sending emails to fund members.
Insight: few funds use TCFD reports to improve their member engagement.
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