TCFD reporting: A progress update 1 year on… 

The UK is one of the first countries to introduce climate change reporting for private sector pension schemes and authorised master trusts. Pension schemes with assets of £5bn+ were required comply with TCFD requirements from October 2021. We are now one year into the process and have received feedback from the early adopters.  So what are some of the lessons that have been learnt from the first wave of TCFD reporting? We set out below common themes we have seen when receiving feedback on the TCFD reporting requirements.

Whether you’ve already completed your TCFD report and are looking to make improvements to your processes for next time, or you’re approaching TCFD reporting for the first time, we offer training and assistance. Speak to your usual Mercer contact or contact us here.

Common themes on TCFD reporting process

  • Complexity – Expect changes!

    Trustees have told us that the key to managing this is to have a clear action plan (say of 12 months) to help keep on track and provide focus on measurable outputs to discuss and finalise at each meeting.

    In particular, we recommend starting early on your governance policies. This includes engaging early with the Company sponsor on their own objectives and what they may be expecting from their pension arrangements.

    This area is changing rapidly. Many schemes will note significant changes in the number / types of metrics reported, data available and best practice over the first few years they consider climate change.

  • Data is mixed and complex

    Trustees are certainly impressed with the amount of data that is available now than ever before – carbon emissions data is now more readily available than in previous years and availability continues to improve.   However, there is also frustration with some data still missing and a lack of consistency on how data is reported between different providers.

    This is an area where we expect harmonisation over time through regulatory definitions, and we expect the availability of data to improve over time due to the increased demand from Trustees and other parties. We recommend speaking to your investment consultant / fund managers early in the process to understand or metrics they can provide you directly – and what limitations there are.

  • It can be costly – financial and time

    Another common piece of feedback is the sheer amount of time required to understand the requirements, review the data and publish the report. This is another area where having an action plan can help to keep meetings concise with a clear focus on the objective of each session.

    We acknowledge that this support and knowledge building does come with a financial cost – and therefore understanding what is included at the outset is invaluable.

  • Engagement is exciting

    As Trustees are going through the reporting process, they are actively engaging and debating the climate strategies of the employer, the pension scheme and the wider industry and comparing these to the needs of the membership whilst also ensuring adequate financial returns for members. Trustees get the most value from the reporting process. Trustees are also keen to discuss their climate change position with their members, and build on the engagement with them to help enhance their overall pension offering. Long may this continue!
Top tip: Plan, plan and plan some more – allow plenty of time before your report is due. The value-add in the TCFD reporting process is to understand what the report is telling you, what your potential risk exposures may be and what actions you may wish to take.

Common themes on TCFD pillars

  • Overall TCFD report – industry examples

    During 2022, many schemes were reporting for the first time and were looking for examples to help, but finding that not many precedents were available. We note that DWP have issued guidance on what the TCFD report should contain but they do not have a clear template for the style or the format of the report.

    One of the challenges we have found is deciding on the right messaging for this report along with the right level of detail – there is a balance between aiming this to members as well as meeting regulatory requirements.

  • Scenario analysis

    Scenario analysis has enabled Trustees to quantify transition and physical risks and explore opportunities to mitigate them. For example, what might a rapid transition do to £100 now in 8 years’ time? Will this cause a fall in value from a projected baseline of £130 to £120 in the future? What impact would a sustainable tilt have upon performance?

    Scenario analysis has also helped Trustees understand top-level strategic risks and opportunities facing pension schemes e.g. DB schemes are focused on funding impact, with DC and DB pension schemes looking at investment returns.

    We also note that the “higher” temperature scenario is one to be avoided from an investment perspective (and a personal one too!).

    We have found that Trustees have used scenario analysis to support allocation to new assets (e.g. real assets), as well as aligning the scenario analysis triennial review alongside the triennial strategy review.

  • Metrics

    Whilst scenario analysis looks at a top-down view from a strategic allocation perspective, the information on metrics provides a bottom-up analysis of the underlying investment holdings. 

    These are as follows with brackets denoting common examples we have seen used for each: absolute emissions metric (absolute emissions), carbon intensity metric (carbon footprint, WACI), portfolio alignment metric (implied temperature rise, % of companies setting science-based targets) and another metric (data quality, engagement activity). 

    We note that for carbon intensity, carbon footprint is a more prevalent measure than WACI but that a number of Schemes are electing to show both. Trustees have found this helpful in understanding the climate-related exposures of what they are holding and by providing these numbers, helping it become more “real” for Trustees.

    However, we do note a common theme is coverage which is highest on listed equities and then corporate bonds, but fairly limited coverage/availability for other asset classes. We note that for those Schemes that need to include Scope 3 emissions (which can be larger than Scope 1&2 combined), they are choosing not to set targets that include Scope 3 currently due to data coverage/availability issues.

  • Targets

    Given the above, Trustees may be more comfortable setting climate-related targets on listed equities and corporate bonds, and having a focus on improving data coverage for other asset classes. We note that most targets have been set on emissions-related metrics and data quality.

    The DWP regulations require the Trustees to be clear on the timeframe of the target, which should be within 10 years (or an explanation why not if longer) but we also note a need to be transparent on what asset classes the targets are based on and any limitations.

    Other feedback received has been discussing alignment between DB and DC sections and between the Company and the Scheme – these have to be taken on an individual case and may not always be appropriate.

Whether you’ve already completed your TCFD report and are looking to make improvements to your processes for next time, or you’re approaching TCFD reporting for the first time, we offer training and assistance. Speak to your usual Mercer contact or contact us here.
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