How can schemes measure their carbon footprint?

Carbon metrics and data will be a huge focus for pension schemes as they look to comply with the forthcoming climate disclosure regulations as well as meet pledges to be net-zero by 2050 or earlier.

Schemes need to understand and measure their portfolio's current and ongoing carbon footprint, which requires obtaining emissions data on their assets from either their investment managers or an independent third-party source.

Getting a grip on carbon emissions is a developing area, and there are a number of metrics and measures that trustees can use, says Barnett Waddingham policy and strategy lead Amanda Latham.

"The best metrics will really depend on the strategy and approach of the scheme and multiple measures will be needed to help trustees effectively manage the transition to a low carbon economy," she says.

Professional Pensions' parent company Incisive Media will host its inaugural Sustainable Investment Festival on 22-25 June to help schemes, trustees and advisers navigate this rapidly-evolving area of the market. Click here for more information.

Interim targets

Principles for Responsible Investment (PRI) senior specialist for climate change and energy transition Edward Baker says firstly, schemes should set an interim target for five years or 10 years in the future, which is "crucial for the credibility of net-zero commitments".

Schemes can look at both absolute carbon emissions and emission intensities, and there are trade-offs between the two, says Baker. "But for establishing a benchmark, on which you look to base future climate action or emission reduction, it is best to use a total emissions metric," he adds.

Carbon intensity, which is emissions divided by activity, can be useful to compare companies within certain sectors such as the oil and gas industry.

However, Henrik Jeppesen, head of investor outreach for North America at Carbon Tracker, explains there is a problem with this measure. If a company's activity increases over the years but their carbon emissions barely change, then their carbon intensity ratio will fall. Schemes should therefore focus on absolute emissions because "we don't solve the actual problem of carbon emissions or climate change by relative measures on intensity," he says.

Overcoming challenges

There are several challenges to measuring carbon emissions across portfolios. Firstly, it is harder to track data on some asset classes such as sovereign bonds or private markets, while it is much easier in public equity and corporate bonds.

Schemes should start looking at assets where there is some availability of data, and then look to work on the more challenging asset classes over time, says Baker. "Investors can do a multi-step analysis, where the first part is doing a hotspot analysis, then do a deeper sectorial dive," he suggests.

There are three main sources of emissions data: corporates as they report their data, service providers or rating providers, and then physical asset data, which is information not recorded by companies but can be collected through other ways.

Schemes should focus on carbon emissions across all three scopes - both what is in under a company's control and what is not. Scope three is challenging as it covers other indirect emissions from activities of the organisation, associated with business travel, procurement, production of inputs, use of outputs, waste and water.

Baker says: "The consistency of data from scope one and scope two is fairly good across the providers, but there is no correlation at the scope three level. The absence of any correlation between the providers obviously makes investors a bit nervous about how trustworthy [the data is]."

However, investors need to look at scope three emissions because they can be the greatest share of a company's carbon footprint, says Jeppesen. "Somewhere between 80% and 90% of the emissions from oil and gas are derived at combustion of the fuel, such as a car or machine, which means that if an oil and gas company sets a carbon emission target, they are only really targeting 10%-15% of the actual problem," he adds.

Baker points out that while scope three is a challenge, pension funds should "try not to solve complex problems first".

A lot of climate disclosure has improved at least on paper since the launch of the Taskforce for Climate-Related Financial Disclosures (TCFD), which an increasing number of companies are using in their reporting, says Jeppesen. "However, the TCFD does not gives a lot of hardcore numbers on carbon emissions," he says.

But as legislation on climate change disclosure increases, carbon emissions reporting from companies should improve over time.

Be forward-looking

Another challenge with using carbon emissions to calculate metrics is they tend to be "historical and backward-looking" and "do not provide an accurate picture" of how a portfolio is positioned in terms of climate risk or carbon emissions in future, says Latham.

"More than understanding the carbon emissions today, trustees need forward-looking information to help reduce the carbon footprint of their scheme," she adds.

Jeppesen agrees, pointing out that carbon footprinting helps set the goalpost for schemes to get to net-zero but "it won't solve their problems". They need to go beyond to look at how to position themselves in the future. "The only way we can really have a big influence is where the future carbon is going to be. It is important to focus most of your effort on looking at how these companies are going to position themselves in the future."

Latham suggests that pension trustees could consider measures such as the outcomes of managers' engagements on climate change, alongside emissions.

She concludes: "Looking at carbon emissions alone [also] misses the role of effective stewardship in shifting company behaviour to build long-term value for members and generate sustainable benefits for the economy, the environment and society."

Stephanie Baxter is a freelance journalist working at Rhotic Media

Sustainable Investment Festival, 22-25 June

Professional Pensions' parent company Incisive Media will host its inaugural Sustainable Investment Festival this summer, featuring keynote speakers, innovative breakout events and sessions to help schemes, trustees and advisers navigate this rapidly-evolving area of the market. Click here for more information.