Pension Funds and TCFD
The research institute Pensions for Purpose released a report to show readers the application and challenges of pension funds in TCFD field by investigating the climate-related financial disclosure of different types of pension funds.
Pensions for Purpose is committed to promoting impact investment action of pension funds. This study shows the progress of pension funds in climate-related financial disclosure and their actions towards governance, strategy, risk management, metrics and targets of the TCFD framework.
Research Based on Governance
In TCFD, pension funds need to integrate and analyze relevant data. There are three common ways to obtain these data. One is to contact investment managers, and then the pension funds collate the data. The second is to contact data providers to obtain standardized data directly. Third, contact the investment consultant, who will sort out the data and give it to pension funds. At present, 75% of pension funds choose to reach investment consultants for these data.
In addition to the way of obtaining data, some pension funds mentioned concerns about fiduciary duty. No matter what type of pension fund it is, its main focus is still on financial returns, and too much investment in climate change may not agree with investors’ opinions. According to the report, regulators need to clarify whether pension funds bear climate responsibility to alleviate their concerns.
Research Based on Strategy
In terms of strategy, the report believes that although pension funds participate in TCFD, they have not yet applied the report to their own investment strategies. The possible reasons for this phenomenon are as follows:
- Data reliability is insufficient. TCFD relies on the emission data of the invested companies. If data cannot accurately reflect the company’s disclosure, pension funds cannot determine the company’s ideal emission reduction target;
- TCFD application time is insufficient. TCFD has become a mandatory disclosure in the past two years, but all participants have not accumulated enough data to see the impact of long-term trends;
- The regulatory objectives of TCFD should focus on the company. TCFD requires pension funds to carry out climate-related financial disclosure, but the actual emissions come from the invested companies rather than the investment process;
Research Based on Risk Management
In terms of risk management, pension funds need to consider three issues:
- How to identify and reduce material risks. Pension funds spend a lot of efforts to calculate climate risk, but they invest less to mitigate climate risk. The report believes that pension funds should take material risks into consideration and put forward plans to mitigate these risks;
- How to improve the data quality of investment objectives. For listed investment targets, pension funds can obtain high-quality carbon emission data (for example, more than 90% of listed companies have disclosed Scope 1 2 data), but for bonds without consistent standards, the error in data estimation will be large;
- How to ensure the authenticity of the report. Whether it is independent assurance or relying on third-party audit, the current data quality makes the authenticity of the report inadequate;
Research Based on Metrics and Targets
In addition to the impact of data quality on metrics and targets, the report also mentions the problems of information disclosure of some pension funds. For example, pension funds focus on the realization time of the net zero goal in the process of setting goals. Some funds choose 2040, while others choose 2050. The net zero goal may become a tool for competition between funds.
According to the report, pension funds need to actively communicate with the invested companies to change their carbon emission actions, so as to achieve their own net zero goal.