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Read paragraphs 117 to 165 of part 3 of the Department for Work and Pensions' (DWP) for more on the requirement to calculate a minimum of three climate change metrics, including at least one absolute emissions metric and one emissions intensity metric.

Example steps to take

Taking the following actions may help you meet your obligations to calculate metrics.

Select and review your metrics

Use your scenario analysis and the metrics recommended in the DWP’s guidance to help you select at least three metrics for your scheme.

Adopt a process to review these at regular intervals or when there is a change in circumstances that makes such a review appropriate, for example, if there’s a significant change in investment arrangements. You could do this alongside reviews of your scenario analysis.

Selecting metrics

Example 1

The trustees of the JKL pension scheme are considering what metrics to select and report on for their scheme. They want to ensure:

  • the metrics are objective, understandable, trackable over time and supportive of decisions being made.
  • they are consistent and comparable across their portfolio where possible, and given any limits in data
  • they understand what a target set against those metrics might look like

Following a review with their advisers, the trustees agree to select and report on the following absolute emissions and emissions intensity metrics:

Total Carbon emissions (absolute emissions metric)

The absolute GHG emissions of their scheme assets should:

  • be calculated in line with the GHG Protocol methodology
  • include Scope 1 and Scope 2 emissions initially (and Scope 3 emissions once required)
  • be reported in terms of million tonnes of CO2

Example target: Reduce net Scope 1, 2 and 3 emissions to zero by 2050, with an interim target to cut emissions by 40% relative to a 2020 baseline by 2030.

Carbon intensity (emissions intensity metric)

The volume of carbon emissions per million pounds invested for the scheme's assets should be calculated and expressed in tons of CO2e/£M invested.

Example target: Reduce the carbon emissions intensity of the scheme's assets by half by 2030, from a baseline start of 2020. In addition, aim to reduce this intensity by 20% by 2025, in line with their decarbonisation trajectory.

The trustees agree they will only select appropriate targets for at least one metric once they have completed the scenario analysis.

Example 2

The trustees of the MNO pension scheme are considering what additional climate change metric they might select and report on for their scheme. They know they can choose different metrics for different parts of the portfolio, and they can select an alternative additional climate change metric to those listed in the DWP’s guidance if they explain why.

The trustees decide to calculate a range of climate change metrics in line with those listed by the DWP and to apply them to different parts of their portfolio.

Portfolio temperature alignment metric (portfolio alignment metric)

This metric compares the implied warming potential of the portfolio to established indices and indicates how the portfolio is positioned compared to the 1.5 degrees Celcius objective of the Paris Agreement and the broader landscape in terms of carbon intensity and transition risk.

Climate value at risk (VaR)

This metric provides a forward-looking valuation assessment to measure climate risks and opportunities in the trustees’ portfolio over different time horizons. The trustees believe this will help them adjust investment holdings to limit exposures to climate-related risks and maximise exposures to opportunities.

Data quality

This measure will calculate the proportion of the portfolio for which Scope 1 and Scope 2 emissions (and Scope 3 emissions once required) are available.

The trustees also agree to calculate some alternative metrics and monitor progress against these. They include:

  • the proportion of assets and operating, investing or financing activities that are:
    • materially exposed to physical risks
    • aligned to climate-related opportunities
  • the percentage of asset value exposed to:
    • material physical climate-related risks
    • transition risks

Gather data on greenhouse gas emissions ‘as far as you are able’

Establish systems and processes to obtain scope 1, 2 and 3 greenhouse gas emissions attributable to the scheme’s assets. The data must then be used to calculate your metrics, as far as you are able. This is likely to involve early engagement with service providers and third parties.

Use the most recent data available, even if the data is not from the current year. Document the steps you have taken, including engagements with your service providers. This may help demonstrate why you were not able to obtain some data.

Where it has been difficult to obtain data for your first reporting period, you should fill gaps as far as you are able. For example, use estimated or proxy data and then develop a plan for improvements in future.

If your asset manager is only able to provide data for part of your portfolio, develop a plan and timetable for improvement. Be aware that the quantity and quality of the data available should improve for future reporting periods.

Use the metrics to inform risk management

As with other activities in this guidance, use your work here to develop other aspects of your governance of climate-related risks and opportunities. As far as you are able, use the metrics to identify and assess the climate-related risks and opportunities relevant to your scheme.

Consider the extent to which the metrics you have used have been limited by data constraints and the impact this might have on decision-making.

Document how you have used the metrics, the advice you have taken, and any relevant outcomes, such as whether they led to changes in your investment strategy or in implementing investment arrangements or your scheme procedures.

Example: using a metric in risk management

The trustees of the PQR scheme are concerned that significant exposure to fossil fuels represents a reputational risk for the employer and potentially exposes the scheme to losses from stranded assets.

Their employer’s business is heavily dependent on its ethically focused brand. The trustees have taken covenant advice and believe exposure could present a material risk to the employer covenant and undermine the security offered to the scheme.

They decide to measure the scheme’s exposure to fossil fuel revenues as an additional climate change metric.

To calculate the metric, the trustees identify investee companies with exposure to fossil fuel extraction (oil, coal and gas) and energy generation from fossil fuels. Then, the relevant revenues are aggregated to give a figure for the scheme's total equity portfolio. The trustee's target is for this exposure to be less than 50% of the equivalent exposure in a market cap-weighted benchmark portfolio.

Currently, this data is only available for listed equities. The trustees are working with their investment managers to develop an equivalent metric for their credit portfolio, setting a timetable for this work.

What to report

When reporting on the steps you have taken, you must describe:

  • the metrics you have calculated
  • if you have been unable to obtain data to calculate the metrics for all of the scheme assets, why this is the case

You should also:

  • use the metrics recommended by the DWP, or explain why you haven’t done so
  • explain the methodology you have used for each metric, including those of any asset managers or third-party service providers and the reasons for your approach
  • when reporting total greenhouse gas emissions and carbon footprint:
    • state the proportion of assets for which data was available
    • explain if any data was unavailable, estimated, or of uncertain quality, giving reasons why
    • indicate if you made any significant assumptions due to missing data
    • report your absolute emissions in the amount of CO2 equivalent and
    • set out the scope 1 and 2 emissions of assets separately from scope 3 emissions
  • if you are reporting on only a proportion of your portfolio, explain the proportion on which you are reporting
  • report the data at a combined level that is most meaningful for your scheme arrangements

You may also choose to disclose some or all of your metrics against a relevant benchmark. This may help identify the relative performance of your portfolio.