‘No evidence’ pension fund TCFD reporting driving change on climate

Some pension funds ‘only viewing it as a compliance obligation’

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Laura Miller

UK pension funds are being hampered in their Task Force on Climate-related Financial Disclosures (TCFD) by unreliable or limited data, and need clearer guidance from the government on how to report, according to research.

Analysis from Pensions for Purpose, which helps pension funds invest for impact, found most pension funds are not yet using their TCFD reporting to inform and drive their climate investment strategy.

From the pension funds interviewed there was “no strong evidence” the rules were driving climate action.

This was partly due to limitations in data and partly due to the infancy of TCFD reporting, with some pension funds “only viewing it as a compliance obligation”.

Mandatory requirements to produce annual TCFD reports were introduced for £5bn+ pension schemes and master trusts on 1 October 2021, and extended to include £1bn+ schemes in October 2022, with plans to bring smaller schemes into the rules in due course.

The UK’s department for work and pensions introduced the requirement to make TCFD reporting mandatory to drive change in climate action.

However this latest research suggests while pension funds place high importance on the proper training of board members on climate risk management, many are struggling with the rules.

Pension TCFD challenges

Key challenges were around unreliable or limited data, the credibility of carbon offsets and inconsistent metrics between asset classes. 

Complexities around climate risk calculations were also cited, with the report finding pension funds would benefit from clearer guidance from the UK government on striking a balance on fiduciary duty.

At the moment some funds are advocating for risk-adjusted returns while others favour considering the long-term impact on the world.

Karen Shackleton, chair and founder of Pensions for Purpose said: “More government guidance for TCFD reporting on climate risk, as part of their investment risk assessment, would help trustees balance the pursuit of risk-adjusted returns with climate responsibility.”

Carbon offsets are not widely used in TCFD reports due to questions about their credibility and, while most pension funds see scenario analysis as useful, it currently has limited application, the report found. 

Pension funds are also experiencing a mismatch between assessment and mitigation of climate risks, as “schemes are finding the effort to calculate climate risk disproportionate to the effort to address it”.

TCFD data issues

The research found 75% of pension funds use their investment consultants to interpret data for TCFD reports, while the remainder either ask their asset managers for the data or go directly to data source providers for improved data integrity.

Cameron Turner, the Pensions for Purpose research analyst on the report, said the primary issue in using TCFD reports for pension funds is data. 

He said: “The challenges include inconsistent data between asset classes and difficulties in comparing data from different asset managers, and conflicting views on whether to calculate Scope 3 emissions.

“There are also worries over improvements in data quality increasing the reported carbon intensity of the portfolio, skewed emissions data due to market-value-based emissions intensity metrics, and the use of rolling back data, which can alter it.”

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