The ESG data challenge is intensifying: UK pension schemes obliged to disclose fourth climate metric

Michaela Rizzo reflects on the Department of Work and Pension’s consultation response to climate reporting and stewardship guidance, and considers the impact this will have on UK defined benefit pension schemes.

Specifically, this includes a portfolio alignment metric which the DWP defines as “a metric which gives the alignment of the scheme’s assets with the climate change goal of limiting the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levels” and is aligned with one of the COP goals. An example of this, is the proportion of companies with Science-Based Targets initiative accredited targets to reduce their greenhouse gas emissions. 

This is now the fourth metric that the DWP have required UK pension schemes to disclose around their ESG and climate-related financial disclosures, adding to existing metrics such as emission metrics that are required under the current regulations. The regulations did not however clarify what was expected by the third metric: the “additional climate change metric”, which leaves more uncertainty around how to interpret the guidance.

With any new metric introduction, the question of finding accurate and specific data needed for these calculations is key – and has been a challenge for a number of pension schemes as highlighted in the consultation response. Having spoken to some of the largest DB schemes about the implementation of these mandatory climate metrics so far, it is fair to say their experiences have been mixed. Whilst all appreciate the importance of having this data available to trustees and decision makers, there are still large gaps in disclosures particularly across private asset holdings, making this a time consuming and often expensive exercise to undertake. Specialist consultants have been helping with much of these requirements, however, assumptions have been made where necessary, recognising that the entire financial services food chain needs to help improve disclosure – from corporates through to asset managers – so that data is available for every £1 invested in a pension scheme. 

One of the large pension schemes we spoke to had already considered this metric and was therefore comfortable with this requirement, as they already have the data needed to hand. A representative from one other scheme however said they felt the burden on pension schemes continued to rise and that, as an asset owner, pension schemes were being used as a pilot for requirements that are likely to come to others in due course if the UK is to reach their own net zero target – which felt somewhat unfair compared to other asset owners. 

With pension schemes leading the charge on these disclosures, the data issues and costs are highest for pension schemes, and one scheme added that they were not yet seeing significant differentiation on climate stress testing outputs based on the current data. Others felt it was in line with expectations, having been flagged as likely to come last year, and they will add it to the list of metrics that they are looking at.

The big question then becomes: what impact will this have on their asset holdings? This update is an incremental change to the metrics required but based on the experiences of the pension schemes who have already implemented the first three metrics, it is clear to see that the number of public commitments to net zero by 2050 has increased substantially. 80% of pension schemes > £5 billion size have said they have or are working on a net zero target, according to an LCP survey. That’s not to imply causation between metric publication and net zero goals – rather more correlation – and that trend spans much wider than pension schemes into many insurance companies, banks and corporates, too. 

For new investments, recent conversations have certainly given rise to many more enquiries about carbon emissions from the underlying issuer, so changes in the last couple of years have been very noticeable to those working with pension schemes albeit perhaps at a slower pace than expected. More data is being asked for at credit committees, and issuers that refuse to align with ESG and carbon ambitions are starting to have noticeably fewer investors interested, ultimately causing a pricing differential and strengthening the case and concern for possible divestments or apparent stranded assets in the medium-term.

Overall – pension schemes continue to lead the charge on this – but as ever, the devil is in the detail. So whichever client base you are connected to, the demand for more data and disclosure for or from them is likely to increase, as is the need to improve accuracy – firstly around carbon emissions, and now around temperature increase alignment too, so that, going forward, more sustainable investment decisions can be made.

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