Processes for identifying and assessing climate-related risks

The Trustee’s approach to identifying and assessing climate-related risks and opportunities is comprised of two assessments broadly summarised below.

• Manager assessment

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  The assessment included engagement with all investment managers employed by the Fund to gather and evaluate climate-related metrics and assess the managers’ climate risk management based on:

  • Awareness of climate risk as it relates to the portfolio and steps being taken to proactively manage the risk.
  • Alignment with Taskforce on Climate-Related Financial Disclosures (TCFD), Paris Agreement and Science Based Targets initiative (SBTi).
  • Participation in relevant industry initiatives.
  • Consideration of opportunities related to climate themes.
  • Engagement and escalation practices with the underlying companies or direct management of the assets.

  Further analysis based on the Fund is summarised in the Metrics & Targets section and the Trustee will utilise these findings to monitor managers’ progress in the future years.

• Climate scenario testing and carbon analysis

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  The assessment also included climate change scenario analysis and the assessment of the overall Fund’s carbon footprint.

  Climate scenario analysis is designed to help the Trustee assess the potential impact of climate-related risks on the Fund, the summary of which was provided in the Strategy section. The Fund is generally well protected against climate-related risks, however, of the various scenarios considered, the Trustee views the ‘Disorderly Transition’ scenario most concerning, given the potential of this scenario to negatively impact all Sections to varying degrees.

  Carbon footprint and additional carbon price delta analysis is included in the Metric & Targets section.

  The Trustee intends to carry out climate scenario work in future years to monitor the Fund’s climate-related risks.

Both assessments give the Trustee an indication of the climate-related risks to which the Fund is exposed. Where appropriate, the Trustee distinguishes between transition and physical risks and all risks and opportunities are assessed with reference to the time horizons that the Trustee has identified as relevant to each Section.

Processes for managing climate-related risks

There are three principal ways to manage climate-related risks in the Fund’s investments.

• Strategy

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  Having carried out a climate scenario analysis and carefully considered its output the Trustee recognises that, due to its relatively low allocation to growth assets and the diversification within those growth assets, the Fund is well protected against climate risk even in the most extreme scenarios modelled. The Trustee recognises that climate change risks will continue to evolve and will therefore repeat climate scenario analysis no less than every three years.

  The Fund benefits from a strategic allocation to forestry, and an investment in onshore wind farms. These reduce or offset the carbon emitted by the Fund’s other assets, therefore reducing the Plan’s overall sensitivity to carbon pricing which is recognised to be an influence (although not the only influence) of the financial impacts of climate change which could affect the Fund.

  

  The Trustee also relies on the covenant adviser to provide advice on the ability of the sponsoring employer to continue to meet their obligations to the Fund taking account of all material risk factors, including climate risk.

• Manager oversight

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  Before the appointment of a new investment manager and during the due diligence of investment opportunities, consideration is given to how the investment managers incorporate environmental, social and governance (ESG) factors, including climate change, in their investment processes. The implementation of manager ESG policies is monitored by RBS Investment Executive Limited (RIEL) on a quarterly and annual basis as described below.

  As part of their recent climate risk review, data was gathered on the carbon footprint of the majority of the Fund’s investment managers (covering c. 90% of the assets) along with qualitative information on how the managers are approaching climate risk in their portfolios. This information will form a baseline for monitoring in future years. The Trustee typically engages directly with managers annually to review their practices, including their approach to responsible investment, climate change and wider ESG considerations.

• Stewardship

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  The Trustee also recognises that, through its stewardship activities, it can positively influence the companies in which it is invested in relation to climate risk. The Trustee has delegated its voting and engagement responsibilities in relation to public equity and public credit investments to its appointed engagement partner, EOS at Federated Hermes (EOS). Climate change is a particular area of focus for EOS in its engagements with underlying companies, and the Trustee regularly receives and reviews comprehensive reporting from EOS on the progress of the stewardship activity that it carries out on the Trustee’s behalf.

Integration into overall risk management

The Trustee considers and manages climate-related risks within its wider investment strategy to ensure that the overall investment objective and its principal duty to Fund members (to pay pensions as they fall due) remains achievable. The Trustee ensures that climate-related risks are embedded into the Fund’s overall risk management in two main ways.

1. Governance approach to integrating climate-related risks

   As outlined in the Governance section, the Trustee Board and its various committees have clearly defined areas of responsibility for ESG and climate risk. In particular, the ESG Sub-Committee (ESGC) of the Asset and Liability Committee (ALCO) is responsible for developing and overseeing the approach to responsible ownership and climate management and reporting. These arrangements ensure that climate risk is considered alongside the Trustee’s other risk considerations so that they can be identified, assessed and managed in a proportionate way, coherently with the Fund’s other risks.

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   Where significant concerns arise, these will be addressed by the ESGC, or other committees as relevant, on a case-by-case basis and appropriate actions are agreed.

   The Trustee Directors and the Executive have arranged to receive regular training on climate-related issues, at least annually, to ensure that they have the appropriate degree of knowledge and understanding of these issues to support good decision-making. The Trustee also expects its advisers to bring important and relevant climate-related issues and developments to its attention in a timely manner.

   The expectation is that the Trustee’s ESGC will use the analysis conducted in 2022 as a basis for monitoring investment manager progress towards the Trustee’s stated climate objectives. The ESGC will escalate any material climate-related developments to ALCO, the Risk and Audit Committee (RAC) or the Trustee Board, as appropriate, as and when they arise.

   The Trustee also maintains a regular dialogue with the employer, which includes issues related to climate risk, both in relation to the Fund itself and also in relation to the employer covenant.

2. Investment approach to integrating climate-related risks

   The climate scenario analysis undertaken for the Trustee considered the funding position based on the effect of climate risk on the Fund assets and liabilities. The Trustee has determined that no change is currently required to investment strategy based on the results of its scenario analysis. This is one of the methods by which the evaluation and consideration of climate risk is integrated into its framework for investment strategy decisions.

   Climate risk considerations are integrated into asset-level decision making – as appropriate to each asset class – through the Trustee’s stewardship and application of each investment manager’s policy on climate change which is evaluated by the Trustee.