The Task Force on Climate-related Financial Disclosures (TCFD) reporting in the pension space is currently beset by issues relating to poor quality of climate data and low levels of engagement, according to a new report seen by Net Zero Investor today.
The joint research paper from Impact Lens and pension consultancy Redington found that issues were raised with pension funds over the quality of emissions data, and if funds are unable to rely on the accuracy of emissions data, they are less willing to take action with companies identified as climate laggards.
Often, there was found to be inconsistency in emissions calculations between asset classes.
Frequently these issues came from deriving data from different asset managers, making it difficult to calculate the whole portfolio’s emissions consistently.
When asked what the biggest challenge has been in providing data to clients for their TCFD reports, one asset manager stated being able to compare ‘apples for apples’ between asset classes was the primary concern. This was because both the format and time frames for emissions calculations vary, particularly with listed assets versus more illiquid assets.
One unnamed corporate pension fund quoted in the report stated: “We’re uncomfortable setting emissions targets until the data is higher quality.”
The stakeholders interviewed by Redington also felt that the regulations were not always addressing the pension fund’s wider role in the global low-carbon transition. Several interviewees felt the rules placed too much emphasis on positioning the fund, and not enough focus on company climate transition plans.
We’re uncomfortable setting emissions targets until the data is higher quality.
Engagement within pension funds
Given the significant resourcing funds are allocating to completing their TCFD reports, Redington also investigated how funds are using their report findings to encourage greater member engagement around their climate impact.
Interviewees’ TCFD reports ranged from 18 to 71 pages, with 42 pages the average length. A few funds spoke of plans to make the first couple of pages of their TCFD reports more member-facing, with an executive summary friendly to laypeople, getting the main points across in a nontechnical and easy-to-understand format.
“We’ve had 732 people download our TCFD report, but I’ve got a funny feeling 730 of those are either consultants or people who have to produce a TCFD report themselves”, one corporate pension fund was quoted as saying.
Regarding climate scenario analysis, Redington found that while this was a requirement of the TCFD process it was an area where methodologies are still in their infancy.
The paper also found at “lot of work has been done” on climate shocks and investment stress tests but not as much on how they interlink. As a result, the industry’s ability to translate climate pathways into investment analysis was still underdeveloped, according to Redington.
The report was drawn from interviews with corporate pension funds, both defined benefit and defined contribution, Local Government Pension Schemes, investment consultants and asset managers, as well as findings from a Pensions for Purpose Paris Alignment Forum all-stakeholder event held in Q4 2022.
Last year, a Net Zero Investor investigation found that investors are increasingly using the TCFD framework for climate financial information, but data challenges remain over mandatory climate disclosures.
