Sustainability in pension scheme strategies improve but still room for improvement on disclosures

Sustainability in pension scheme strategies improve but still room for improvement on disclosures

30 Nov 2022

• Over 90% (11 of 12) Taskforce for Climate-Related Financial Disclosures (TCFD) reports analysed indicate strategies and targets linked to Net Zero, with the majority targeting 2050
• 75% (9 of 12) have bespoke responsible investment/climate change policies
• However, there were limited disclosures against certain asset classes and on Scope 3 emissions reflecting widespread limitations on data availability

Large pension schemes have made progress on sustainability, making clear changes to their investment strategies to enhance the sustainability credentials of their portfolios, but there is further room for trustees to strengthen climate reporting to support their commitments, a review of climate disclosures by XPS Pensions Group has found.

The pensions consultancy reviewed climate disclosures of 12 large pension schemes with £320bn in assets under management, made in line with TCFD guidance These are the first round of such disclosures to be published after doing so was made mandatory for schemes with over £5bn, in October 2021.

The review found that 11 of the 12 schemes reviewed have targets in place linked to Net Zero or Paris Agreement Alignment, with the majority of these committing to meet that standard by 2050. Nine of these have developed bespoke responsible investment / climate change policies, going beyond the minimum requirement to address the issue in their Statement of Investment Principles.

There is still room for improvement, though. Reflecting the limited availability of data in the market generally, only three schemes made any disclosures relating to Scope 3 (value chain) emissions, and even here coverage was significantly lower than was reported for Scope 1 and 2. Whilst this is in line with the regulations at this time, expectations are that Scope 3 will become a more mainstream requirement in future. There was also variation in the degree to which assets of different classes were covered by the disclosures, and while carbon data was readily available on listed equities and corporate bonds, data on other assets – particularly secure income, real assets, and private markets – was scarce.

Alex Quant, Head of ESG Research at XPS Pensions Group, said: “The pension schemes who undertook TCFD reporting have made good progress on sustainability, setting out how they plan to continue to create value for their members as they look to manage and contribute to the transition to a low-carbon economy. However, setting targets is the easy bit; schemes must make a concerted effort to fully evaluate their current position and the changes in approach needed to deliver the outcomes indicated”