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It’s not easy being green!

, Pippa Rudling

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It’s not easy being green!

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Reducing the pain of aggregating climate data and regulatory reporting.

 

If you’re a pension scheme trustee you have a huge amount on your plate! Even without the recent LDI market turmoil, there is a long list of issues to consider – end-game strategy, inflation, geopolitical turmoil to name a few. On top of this, the ever-increasing ESG-related reporting requirements are a huge challenge. This was all very apparent at the recent Pensions Age conference in London. 

 

In this blog, which is based on a presentation we made at the conference, I am focusing on climate reporting and TCFD (Task force for Climate-related Financial Disclosures), but we know that the Regulator would like trustees to also consider biodiversity-related risks which will come with TNFD (Taskforce for Nature-related Financial Disclosures). And asset managers are focused on SFDR, which is an EU regulation that aims to improve transparency in the market for sustainable investment products and to prevent greenwashing. 

 

What this means, is that both asset managers and asset owners will increasingly have to manage multiple reporting frameworks.

 

 

What’s it all about?  A short overview of TCFD

 

The Taskforce was set up in 2017 and has developed a framework to help public companies and other firms disclose climate-related risks and opportunities. It has become the de facto framework for climate reporting rules in the UK and EU and other jurisdictions globally. There are four building blocks of TCFD: Strategy; Governance; Risk management; and Metrics and Targets.

 

From the outset the Taskforce highlighted the importance of asset managers and asset owners in influencing companies to better disclose their carbon footprint and help in the fight against climate change and the transition to a green economy.

 

In the UK, in 2021 the Department for Work and Pensions (DWP) introduced climate reporting obligations for pension schemes of a certain size (initially this was £5bn; from October 2022 it’s over £1bn). Trustees of schemes in scope must put in place appropriate governance arrangements to manage their climate-related risks, and to publish a report on how they have done so. 

 

The Taskforce recently published the annual TCFD status report. The report lays out the huge progress that has been made in the past five years, since TCFD was launched, for example the level of detail and accuracy of what companies disclose when it comes to their emissions. However, it also notes the inevitable hurdles still to overcome. Within the report is reference to a survey of both asset managers and asset owners where both groups cite the following main challenges:

  1. Insufficient information from their underlying investee companies
  2. Lack of resources 
  3. Lack of methodologies to calculate metrics

Source: TCFD 2022 Status Report, pages 38 and 44.

 

The first point on quality of emissions data is one that has had much coverage. We have seen improvements in the quality, accuracy and coverage of carbon metrics in recent years, but there is still further to go. The second issue related to resource is more nuanced and solutions will be specific to individual asset managers and asset owners. The final point on methodologies is perhaps most easily addressed.

 

 

“We have seen improvements in the quality, accuracy and coverage of carbon metrics in recent years, but there is still further to go.”

 

 

What gets measured gets managed!

 

Before they’re able to set the Scheme’s climate strategy, trustees must first have visibility of what their climate-related risks are. It’s not all negative – there are opportunities to identify too. Nonetheless this requires calculating metrics such as the carbon footprint and total emissions - at both a fund and overall portfolio level; plus portfolio alignment metrics like the implied temperature of a portfolio. 

 

We see different approaches to gathering those climate metrics in the market today.

  • The first, is simply by asking the Scheme’s investment managers to provide the climate metrics for their funds. At face value this seems a straightforward approach, albeit it requires multiple emails and spreadsheets and perhaps quite a manual process. However, this approach runs the risk of a lack of consistency across all asset managers within the Scheme’s portfolio, as each manager may use different underlying metrics providers and methodologies.
  • Another approach, which we see a number of investment consultant firms using, is to calculate the metrics themselves via one of the leading ESG data providers. This is a valid approach, and certainly solves the consistency issue. However, it is a labour-intensive process and may divert resource away from other more interesting and productive tasks the consultants could do. In the words of one investment consultant we spoke to, “we don’t want to be a data warehouse”.
  • The third approach is to out-source the collation and calculation of the climate metrics to a third-party data provider. By entrusting a specialist provider to calculate and verify the climate metrics, it should free up more time for investment consultants to focus on their value-add responsibilities such as setting the Scheme’s investment strategy, running forward-looking scenario analysis and perhaps planning the journey to net zero.

 

Outsourcing climate metrics calculations can be a cost effective and efficient solution. Nonetheless it is important that trustees and their investment consultant understand the methodology that their provider uses, and that it is transparent and auditable. By understanding how the climate metrics have been calculated, they’ll have a clearer picture of their portfolio’s exposures and risks. And can hold their managers to account if need be. 

 

Consistency across all asset managers within the Scheme’s portfolio is key, so one can fairly compare them and then reach a clear conclusion on the Scheme’s overall emissions. Given that it is a requirement to publish the TCFD report annually, consistency year-on- year is also crucial so trustees can see how the portfolio has evolved over time. 

 

Data quality is an issue, but coverage is improving and in order to make a fair assessment one should be able to compare each year’s report to previous years’ metrics.

 

 

Focus on the ‘value-add’

 

One point that often comes up when talking about TCFD reporting, is how will these published reports be used? Climate reporting shouldn’t just be a compliance exercise. The metrics that the DWP have mandated to be included, are there for a reason. By arming trustees and their investment consultants with this information, they can make the most informed investment decisions – which is what their value add is. Also, what we’re hearing is that actually, this is really interesting! If you’re an investment consultant focused on sustainability and that is what you’re passionate about, you want to get to the crux of the matter and build an effective investment strategy for your client, not spend your time chasing managers for data or running those calculations yourself. 

 

With the ever-increasing ESG-related reporting burden, you can alleviate the resource crunch around calculating metrics by investing in reporting technology. Automate what you can, to allow you to focus on the more interesting parts of your job, and the things that will make the real difference.

 

 

“Automate what you can, to allow you to focus on the more interesting parts of your job, and the things that will make the real difference.”

 

 

AMX is in a unique position to help, as our business has been designed to solve some of the challenges that asset managers, asset owners and investment consultants face. We sit in the middle of the investment ecosystem, and as TCFD regulation is something that impacts every part of the investment value chain, we are in a strong position to help.

 

I noted earlier that there are four building blocks of TCFD: Strategy; Governance; Risk management; and Metrics and Targets. The first three are well covered by the industry leaders – namely investment consultants. The final pillar – Metrics and Targets – is where we often hear the most grumbling about how challenging it is. That is why we built AMX Zero.

 

A technology-led climate change reporting solution

 

AMX Zero is an online climate metric calculation and reporting tool to help trustees and investment consultants produce their TCFD report. 

 

AMX Zero offers:

  • Digital reporting automation 
  • All the carbon emissions and portfolio alignment metrics - including Implied Temperature for scope 1 & 2 - as mandated by the DWP to include in a scheme’s TCFD report. Plus the option to include scope 3 metrics.
  • Forward-looking scenario analysis using Transitions Pathway Initiative data
  • Coverage for all assets including private markets, through the use of a customisable proxy tool 

 

Our detailed methodology document explains our approach to calculating each climate metric that is included in the AMX Zero report. Please get in touch if you would like to receive a copy of this document and to hear more about how we can help with your climate reporting.


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