Metrics disclosure

The Trustee uses a number of metrics to assess climate-related risks and opportunities and expects the quality of data to improve over time. In 2022, the Trustee collated the following information to complete a climate analysis on its invested portfolios:

• Total GHG emissions (Tonnes CO₂).

  • Absolute emissions metric: Total GHG emissions

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    GHGs are categorised into three types or ‘scopes’ by the Greenhouse Gas Protocol, the world’s most widely used GHG accounting standard.

    • Scope 1
    • Scope 2
    • Scope 3

    All direct emissions from the activities of an organisation which are under their control; these typically include emissions from their own buildings, facilities and vehicles.

    These are the indirect emissions; for example from the generation of electricity and energy purchased and used by an organisation.

    All other indirect emissions linked to the wider supply chain and activities of the organisation from outside its own operations – from the goods it purchases to the disposal of the products it sells.

    Scope 3 emissions are often the largest proportion of an organisation’s emissions, but they are also the hardest to measure. The complexity and often global nature of an organisation’s value chain can make it difficult to collect accurate data.

    The Trustee delegated the gathering and calculation of this data at asset class level to Aon. The approach to obtain absolute emissions and carbon footprint metrics is summarised in the appendix.

  • Total GHG emissions

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    The table and graph below summarise the latest available total absolute GHG emissions for the four Sections at asset class level, and a total carbon footprint per Section (and for the Fund as a whole). To ensure consistency of data across all asset classes the Trustee reported Scope 1 and 2 carbon emissions only, due to lack of Scope 3 data availability for all manager mandates*.

    *The Trustee is not required to obtain Scope 3 data in the first scheme year that they are subject to TCFD requirements, according to the DWP Guidance.

    Asset Class	Main Section (Tonnes CO2)	AA Section (Tonnes CO2)	NWM Section (Tonnes CO2)	RBSI Section (Tonnes CO2)	Total
    Asset ClassQuoted equity1	Main Section (Tonnes CO2)228,467	AA Section (Tonnes CO2)-	NWM Section (Tonnes CO2)1,060	RBSI Section (Tonnes CO2)338	Total
    Asset ClassPrivate equity2	Main Section (Tonnes CO2)47,855	AA Section (Tonnes CO2)-	NWM Section (Tonnes CO2)-	RBSI Section (Tonnes CO2)-	Total
    Asset ClassAlternative equity	Main Section (Tonnes CO2)791,005	AA Section (Tonnes CO2)29,037	NWM Section (Tonnes CO2)-	RBSI Section (Tonnes CO2)-	Total
    Asset ClassOffset carbon (forests)	Main Section (Tonnes CO2)-725,000	AA Section (Tonnes CO2)-30,000	NWM Section (Tonnes CO2)-	RBSI Section (Tonnes CO2)-	Total
    Asset ClassAvoided carbon (wind farm)	Main Section (Tonnes CO2)-244,000	AA Section (Tonnes CO2)-	NWM Section (Tonnes CO2)-	RBSI Section (Tonnes CO2)-	Total
    Asset ClassTotal credit	Main Section (Tonnes CO2)937,402	AA Section (Tonnes CO2)54,718	NWM Section (Tonnes CO2)8,734	RBSI Section (Tonnes CO2)2,808	Total
    Asset ClassProperty	Main Section (Tonnes CO2)37,959	AA Section (Tonnes CO2)65	NWM Section (Tonnes CO2)20	RBSI Section (Tonnes CO2)5	Total
    Asset ClassHedging assets	Main Section (Tonnes CO2)86,643	AA Section (Tonnes CO2)1,592	NWM Section (Tonnes CO2)292	RBSI Section (Tonnes CO2)124	Total
    Asset ClassCash	Main Section (Tonnes CO2)6,622	AA Section (Tonnes CO2)-	NWM Section (Tonnes CO2)-	RBSI Section (Tonnes CO2)-	Total
    Asset ClassTotal3	Main Section (Tonnes CO2)1,166,952	AA Section (Tonnes CO2)55,412	NWM Section (Tonnes CO2)10,106	RBSI Section (Tonnes CO2)3,275	Total1,235,746
    Asset ClassAssets @ 30.9.21 (£m)	Main Section (Tonnes CO2)50,462	AA Section (Tonnes CO2)1,114	NWM Section (Tonnes CO2)270	RBSI Section (Tonnes CO2)82	Total
    Asset ClassTotal / £m invested	Main Section (Tonnes CO2)23.1	AA Section (Tonnes CO2)49.7	NWM Section (Tonnes CO2)37.5	RBSI Section (Tonnes CO2)39.8	Total23.8

    Source: MSCI, Managers, Aon

    ¹ Carbon footprint for quoted equity is based on MSCI figures. Carbon footprint for non-quoted assets was obtained from the Managers or estimated by Aon (using sector-based analysis) when appropriate and data not available from managers. Where the data was denominated in foreign currency (predominantly USD) Aon converted it to GBP using the 31 December 2021 FX rate.

    ² Carbon footprint for private equity is based on a sector analysis of each individual manager and applying relevant sector-level MSCI equity data.

    ³ Other assets (insurance, liquidity, currency hedge, options etc) have been assumed to have a carbon footprint of zero. These securities are mostly cash or cash-like, or backed by cash, and hence do not have underlying carbon emissions.

    The discrepancies between the carbon footprint (Tonnes CO₂e / £m invested) can be explained as follows:

    • The Main Section has significant offsetting and carbon-avoiding assets (forests and windfarms) which reduce the carbon footprint of that Section by c. 45%.
    • The AA Section has a significantly higher proportion invested in credit than the Main Section (and proportionately less offset) which drives the higher carbon footprint.
    • The carbon footprint for both the NatWest Markets (NWM) and Royal Bank of Scotland International Limited (RBSI) Sections are broadly comparable, with the slight difference due to their slightly differing asset allocation.

    Overall, carbon data coverage for the Fund’s applicable assets is c. 90%. Data coverage at asset class level is captured in the graph below. Further information on carbon data sources can be found in the appendix.

    Total absolute carbon emissions (tonnes CO₂)

    

    Carbon data coverage on asset class level

    

    *Quoted equity coverage is applicable on the direct exposure to equity securities and excludes derivative positions.

• Carbon Footprint (Tonnes CO₂/£m invested) and additional carbon price delta analysis.

  • Carbon footprint per asset class

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    The table and graphs below summarise latest available carbon footprint (tonnes CO₂/£m invested) for the four Sections and each asset class. As previously stated, the Trustee has reported on Scope 1 and 2 carbon intensity only.

    Asset Class	Main Section (Tonnes CO2/£m invested)	AA Section (Tonnes CO2/£m invested)	NWM Section (Tonnes CO2/£m invested)	RBSI Section (Tonnes CO2/£m invested)
    Asset ClassQuoted equity1	Main Section (Tonnes CO2/£m invested)149.1	AA Section (Tonnes CO2/£m invested))-	NWM Section (Tonnes CO2/£m invested))87.1	RBSI Section (Tonnes CO2/£m invested))87.1
    Asset ClassPrivate equity2	Main Section (Tonnes CO2/£m invested)55.1	AA Section (Tonnes CO2/£m invested))-	NWM Section (Tonnes CO2/£m invested))-	RBSI Section (Tonnes CO2/£m invested))-
    Asset ClassAlternative equity	Main Section (Tonnes CO2/£m invested)384.9	AA Section (Tonnes CO2/£m invested))714.1	NWM Section (Tonnes CO2/£m invested))-	RBSI Section (Tonnes CO2/£m invested))-
    Asset ClassOffset and avoided carbon3	Main Section (Tonnes CO2/£m invested)-2,848.2	AA Section (Tonnes CO2/£m invested))-2,087.0	NWM Section (Tonnes CO2/£m invested))-	RBSI Section (Tonnes CO2/£m invested))-
    Asset ClassTotal credit	Main Section (Tonnes CO2/£m invested)141.8	AA Section (Tonnes CO2/£m invested))194.3	NWM Section (Tonnes CO2/£m invested))72.3	RBSI Section (Tonnes CO2/£m invested))73.5
    Asset ClassProperty	Main Section (Tonnes CO2/£m invested)16.8	AA Section (Tonnes CO2/£m invested))2.3	NWM Section (Tonnes CO2/£m invested))2.5	RBSI Section (Tonnes CO2/£m invested))2.5
    Asset ClassHedging assets	Main Section (Tonnes CO2/£m invested)3.4	AA Section (Tonnes CO2/£m invested))3.4	NWM Section (Tonnes CO2/£m invested))3.4	RBSI Section (Tonnes CO2/£m invested))3.4
    Asset ClassCash	Main Section (Tonnes CO2/£m invested)1.6	AA Section (Tonnes CO2/£m invested))-	NWM Section (Tonnes CO2/£m invested))-	RBSI Section (Tonnes CO2/£m invested))-

    Source: MSCI, Managers, Aon.

    ¹ Carbon footprint for quoted equity is based on MSCI figures. Carbon footprint for non-quoted assets was obtained from the Managers or estimated by Aon (using sector-based analysis) when not available from managers. Where the data was denominated in foreign currency (predominantly USD) Aon converted it to GBP using the 31 December 2021 FX rate.

    ² Carbon intensity for private equity is based on a sector analysis of each individual manager and applying relevant sector-level MSCI equity data.

    ³ Offset and avoided carbon includes wind farm and forest assets. Please note that wind farm assets are present in the Main Section portfolio only.

    • Quoted Equity

      The carbon footprint intensity measure is markedly different between the Main Section and the NWM and RBSI Sections. The latter two Sections invest in a passive global equity fund while the Main Section has equity holdings with a spread of active equity mandates.

    • Private Equity

      Private Equity carbon metrics have been estimated by Aon using a sector analysis for each individual fund, the weight in respective sectors of each fund have been multiplied by a proxy, the respective sector carbon metrics of the MSCI World Index.

      The relatively lower carbon intensity of the private equity portfolio as compared to quoted equity is driven by lower allocation to carbon intensive industries such as energy, materials and utilities and higher allocation to sectors such as information technology, financials and consumer discretionary.

  • Carbon price delta analysis

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    The Fund benefits from holding both forestry and windfarm assets. The forestry assets sequester carbon, and the Fund has increased the amount sequestered by reducing the frequency of harvesting for one of the forests. The windfarm assets produce electricity with no operational carbon emissions and therefore it is possible to take credit for the avoided carbon from those assets. In total, the sequestered and avoided carbon amounts to almost 1MT CO₂e each year. This has the effect of reducing the total carbon emitted by around 40%, and reducing the Fund’s total carbon footprint by 45%, from 43.4 tonnes CO₂e / £m invested to 24.0 tonnes CO₂e / £m invested.

    

• Portfolio assets adopting SBT

  SBTs provide a clearly defined pathway for companies to reduce GHG emissions, helping prevent the worst impacts of climate change and future-proofing business growth. GHG reduction targets are considered ‘science-based’ if they are in line with the latest climate science data necessary to meet the goals of the Paris Agreement – limiting global warming to well-below 2℃ above pre-industrial levels and pursuing efforts to limit warming to 1.5℃.

  The long-term nature of SBTs provides a clear direction of travel and can offer insight into important market trends that will be shaped by the low carbon transition. The targets are created by the SBTi and are scientifically confirmed requirements that will set the path for transitioning to a low (preferably zero) carbon economy.

  SBTi are a voluntary commitment for corporates. They require the development of an emissions reduction target in line with the SBTi’s criteria, presenting the target to the SBTi, and receiving official validation. SBTi do not currently provide criteria for every type of company. There are also many companies who have set transition pathways and plans to net zero emissions but have not had them approved by the SBTi.

  The two graphs below capture the proportion of holdings that are signed up to the SBTi, or have net zero targets (either signed up to the Paris Agreement or with net zero emissions by 2050 or earlier) across the applicable asset classes¹ for each measure. Hedging assets have not been included in the main analysis of current levels of portfolio alignment to SBT nor net zero emissions on the basis of guidance from the Institutional Investors Group on Climate Change (IIGCC) Net Zero Investment Framework (NZIF) where it is recommended hedging assets are not included in transition pathways.

  Assets such as wind farms and forests are naturally aligned with net zero but have not yet developed SBTs. RIEL is also encouraging the Trustee’s asset managers to adopt appropriate net zero targets. A summary of the current position among the Trustee’s asset managers is included in the appendix.

  ¹ Applicable assets refer to the entire portfolio excluding investments in hedging assets, insurance, derivatives and cash portfolios. SBT are not applicable due to the nature of these asset classes.

  • Manager Assessment

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    Manager climate risk assessment, which included assessments of:

    • Managers’ alignment with Taskforce on Climate-Related Financial Disclosures (TCFD), Paris Agreement and Science Based Targets initiative (SBTi);
    • Ability to support climate scenario analysis;
    • Participation in industry initiatives; and
    • Engagement and escalation practices with the underlying companies.

    Based on the manager climate risk assessment, the Trustee chose the proportion of assets aligned with SBTi as its measure of climate-related risks to formally track and target. The Trustee chose this metric as it is the underlying companies that emit carbon, not the securities. To overcome the climate crisis, companies need to meet the Paris Aligned targets. By measuring the percentage of assets aligned to SBTi, we measure real world change rather than asset allocation changes that will not help solve the climate crisis. Setting targets based on this will focus the Trustee’s engagement of the Fund’s investments to encourage alignment to Paris based targets. As a final measure the Trustee will divest of investments that are not aligned to net zero.

    The Trustee’s investment adviser, Aon, requested data from all the Fund’s managers.

    • Net zero
    • SBTi
    • TCFD
    • Initiative

    Twenty two out of thirty-one managers (excluding insurance assets) have committed to net zero emissions by 2050 or aligned their portfolios with Paris Alignment or Net Zero.

    Thirty-four managers were asked to answer questions regarding their processes for identifying, assessing, and managing climate-related risks.

    Fourteen managers have either signed up or are working towards the SBTi’s.

    Fourteen managers across quoted equity, alternative equity and credit reported the proportion of holdings aligned with the SBTi. For example, 55.6% of holdings in the SGA equity portfolio have either committed to or are aligned with Science Based Targets (SBTs). SGA are systematically engaging with all companies on their Qualified Company List in this regard.

    Two managers (Vantage and New Forest) within the alternative equity asset class are currently working towards the SBTs.

    Twelve managers completed their climate risk disclosures in line with TCFD guidance and made their reports publicly available.

    Twelve managers have published their TCFD reports on a public platform. Many of the remaining managers are either working towards publishing their TCFD reports in 2022 and / or publicly support the TCFD recommendations.

    Over 75% of managers are signatories to various investor-led industry initiatives related to addressing climate change.

    Over 75% of managers are signatories to various inventor-led industry initiatives related to addressing climate change, such as Paris Aligned Investment Initiative, Global ESG Benchmark for Real Assets (GRESB), Institutional Investors Group on Climate Change (IIGCC), Net Zero Asset Managers Initiative (NZAMI) etc.

  • Summary Conclusion

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    All the investment managers contacted displayed adequate understanding of climate-related risks and the overall response level was of a reasonable quality. These responses received will provide a base line for future TCFD reporting years.

    The assessment of the Fund’s investment managers will form a basis for future engagement activities. When prioritising its engagement with the managers, the Trustee will consider the overall significance of each mandate within the Fund’s portfolio. Factors that go into this include:

    • Contribution towards overall Fund carbon footprint: Focus on portfolios which make a high contribution to the overall carbon footprint since this is where the highest impact of any climate-related risks is likely to occur.

    • Asset class and possible climate-related risk associated with it: Certain asset classes have a higher climate-related risk exposure than others and will be a particular engagement focus. For example, the Fund’s exposure to credit contains the highest emissions and the Trustee will engage with those managers to understand if this is being considered in the investment process and how that risk can be managed moving forward.

% of portfolio assets signed up to SBT

% of assets signed up to net zero by 2050 (on manager and portfolio levels)

If hedging assets were included in the analysis, the percentage of portfolio assets aligned with net zero by 2050 would be 67%.

Targets to manage climate-related risks

The Trustee has decided to not only set the trajectory for the Fund’s assets in line with its net zero commitment, but also measure the proportion of portfolio companies, by allocation weight, that have aligned to SBT using 2021 assessment as a baseline year. The Trustee anticipates doing this via an annual questionnaire to assess managers' progress against the implementation of the SBTs, while also utilising its engagement partner to encourage investee companies to adopt SBTs across the Fund’s invested portfolio.