4 minute read
Beyond TCFD: Why it's important to think about sustainability in the round
By Natalie Winterfrost | Law Debenture
Publishing Taskforce for ClimateRelated Financial Disclosures (TCFD) reports has been quite a learning curve over the last few years. On balance I am pleased that large schemes have been required to produce these reports, but there are pros and cons.
One of the most obvious negatives is that the reporting requirements are extensive and prescriptive and making sure ‘every box is ticked’ in each year’s reporting can use up much time that might otherwise be spent furthering thinking on climate risk management and identifying opportunities.
However, I think this negative has, at least to date, been outweighed by the impact it has had on pushing climate risk management up the pension scheme agenda.
The compulsion to report on climate risk management has led to appropriate challenge of fund managers and changes to investment guidelines and benchmark both to manage climate risk and beyond. (Most of the boards I sit on thought about whether they should create a TCFD working group, but in the end plumped for an ESG committee.)
Some things haven’t been working well with reporting. Data is a problem. We knew from the start data was going to be an issue, not least because pension funds were required to disclose data before anyone else in their investment chain was required to supply it.
Reporting schemes have all created their ‘base data’ and yet it’s going to be far from perfect as a comparator for future years. Data on alternative asset classes is often missing or made up. Even though available, some consultants were very unwilling to include sovereign debt data in base data because they thought calculation methodologies might change.
Methodologies in some areas have changed, making year to year comparisons apples versus pears, unless base data is subsequently revisited. I do feel though that two years on, scope 1 and 2 data (direct greenhouse gas emissions and those from energy purchased) are getting much better.
Scope 3 data (all the other greenhouse gas emissions throughout your supply chain) is another whole challenge. Scope 3 disclosures really are largely based on sector averages by company revenue. It doesn’t tell you much if anything at all about the risk management efforts of the companies you hold in your scheme, and it swamps scope 1 and 2.
Another big problem in the preparation of our TCFD report is the scenario analysis. If this planet warms by three degrees beyond pre-industrial levels, we expect millions of people to be displaced and cities like Miami and Shanghai, as examples, to be claimed by the sea.
Add to the displacement of some 18 million people extreme weather events that will threaten crops and that much of today’s agricultural land may be turned to desert anyway, it seems hard to envisage economic prosperity and stable geopolitics. And yet the ‘hothouse world’ scenario analysis carried out by consultants tells us our investment strategies will be resilient to such outcomes, shaving a couple of percentage, perhaps, off our funding levels. Hardly material.
Regulators and policymakers are picking up on this and challenging us trustees to push back on our consultants. Many trustees, including myself, were doing this anyway but when the consultants were all using the same models and defending them robustly there isn’t really much a trustee can do (beyond caveating the findings in their reports).
The other point worth making is that we cannot focus on greenhouse gas emissions in isolation. As stewards of capital, needing to ensure that there are investable assets able to deliver financial returns over the long term, we need to consider matters in the round. That includes other environmental and social factors.
The just transition is important - we need to support emerging countries to transition whilst also recognising much of their population should be entitled to a higher living standard (which might come with increased emissions). We also need to recognise the importance of biodiversity and water.
In some ways, the TCFD framework has overly concentrated trustee resources on just one aspect of sustainability at the expense of others.
We have recently seen the publication of TNFD (the Taskforce for Nature-Related Financial Disclosures) and a consultation by the Social Factors Taskforce and this might address the balance, forcing trustee boards to think in the round.
I for one want to move towards publishing a sustainability report for my pension funds that covers social, nature and other ESG risks. This would be consistent with the aims of the IFRS’ International Sustainability Standards Board.
