Climate change and the UKRF
Addressing climate change by reducing the amount of greenhouse gases in the atmosphere is one of the most complex and challenging issues facing the world today; governments and organisations are implementing policies to achieve the decarbonisation of the global economy and to achieve net zero commitments.
A key fiduciary duty for pension scheme trustees is to ensure members’ benefits are paid. The Trustee of the Barclays Bank UK Retirement Fund (‘the UKRF’ or ‘the Fund’) sees climate change as a key financial risk to the Fund’s investments. To manage this risk, the Trustee aims to align the Fund’s investments with the global shift to a low-carbon economy that comes from the Paris Agreement. This is an international agreement to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.
In order to achieve this, countries must reduce their greenhouse gas emissions to ‘net zero’ by around 2050. Achieving net zero means reaching a balance between the greenhouse gas emissions put into the atmosphere and those taken out.
In line with new reporting requirements, companies and trustees of certain pension schemes must produce a regulated report outlining their approach to climate-related risks and opportunities. This follows the recommendations of the Taskforce on Climate-Related Financial Disclosures (‘TCFD’). The TCFD was commissioned in 2015 by the Financial Stability Board (an international body that monitors and makes recommendations about the global financial system). In 2017, the TCFD published its recommendations and in October 2021 UK regulations came into force. The regulations currently apply to all schemes with net assets of £1 billion or more, although its scope may be extended in the future.
The Trustee of the UKRF has produced its first regulated TCFD report for the period 1 October 2021 to 30 September 2022. The following information provides a summary of this report; including a snapshot of the current emissions from the UKRF’s portfolio, the action the Trustee is taking to reduce emissions in line with Paris Agreement and the challenges the Trustee, along with the pension and asset management industry in general, faces.
What the Trustee has achieved so far
In 2021, the Trustee announced its ambition to achieve net zero emissions from the UKRF’s investment portfolio by 2050. The Trustee believes this is in the best financial interests of the Fund and its members. The Trustee aims to reduce the emissions that the UKRF’s investments generate and protect those investments from the risks of climate change (including physical risk, climate transition risk, and the impact of the pace of change (Fast, Slow or No-Transition scenarios) to a low-carbon economy). By doing so, the Trustee believes it will reduce the risk on the Fund’s investments, thereby helping to protect members’ benefits.
This is a long-term journey and the Trustee of the UKRF has already...
Developed the Trustee's knowledge and understanding of climate-related risks and opportunities and integrated climate-related investment principles into the Fund’s risk management framework
Gathered members’ views on Responsible Investment and environmental issues to inform its approach
Launched a new section of the member website on Responsible Investment
Invested £320 million in renewable energy and £37 million in green UK government bonds with a commitment to invest a further £200 million in green infrastructure
The Trustee’s ambitions
The Trustee has set the following climate-related targets:
50% reduction in greenhouse gas emissions
In line with the goals of the Paris Agreement, the Trustee aims to reduce greenhouse gas emissions from the UKRF's portfolio of investments by at least 50% by 2030.
Improved climate data coverage
As disclosure of climate-related risks and opportunities is a new and emerging area for companies, there are challenges in sourcing and consistently recording the data. For example, within the DB Section of the UKRF, the Trustee is currently only able to collect emissions data for approximately 63% of the investment portfolio. The Trustee will be looking for investment managers to achieve better quality data and coverage of the UKRF’s portfolio (especially for certain asset classes) over time, which will allow better tracking of progress to lower carbon emissions.
Net zero greenhouse gas emissions
In line with the goals of the Paris Agreement, the Trustee aims to reach net zero greenhouse gas emissions from the UKRF’s portfolio of investments by 2050.
More information about the Trustee’s climate-related targets and the different types of carbon emissions is available at Committed to Net Zero.
The role of climate scenario analysis
The Trustee recognises that the global transition to a low-carbon economy is outside of the control of the UKRF. The Trustee can, however, use climate scenario analysis to measure its progress against its targets. This means looking at how the UKRF’s investments might perform in different possible futures to identify the most relevant risks and opportunities from climate change.
The Trustee has considered the following three scenarios:
- Scenario A (Fast Transition): Abrupt transition to the Paris-aligned goal occurring in 2025 (temperature increase kept well below 2°C).
- Scenario B (Slow Transition): Orderly transition to the Paris-aligned goal occurring in 2050 (temperature increase kept well below 2°C).
- Scenario C (No Transition): A no-transition scenario with impacts assessed at 2100 (temperature increase in excess of 4°C).
The analysis has shown:
- Under all three climate scenarios, there is expected to be a reduction in the value of the UKRF's assets due to losses from transition and physical risk.
The Trustee is currently considering strategies that will minimise the risk of such reductions.
- The No-Transition scenario has the largest estimated impact on the change in the UKRF's investment portfolio at -2.0% compared to -1.2% under the Fast Transition and 1.5% under the Slow Transition scenarios.
- The impact of climate change on the liabilities (i.e. the amount needed to pay the members' benefits now and in the future) within the DB Section of the UKRF is also different under each scenario, and is influenced by a number of assumptions, including average life expectancy. More information is included in the full TCFD report.
The Trustee does not consider scenarios A and C to be in the best financial interest of members so is aiming to reach its ambition under the Slow Transition (Scenario B). The Trustee believes this will limit climate risk exposure for the UKRF’s investments, as well as seeking to invest in climate-solution assets to help mitigate climate risk and offer attractive investment opportunities. It’s worth noting that any estimates of changes in value are impossible to accurately predict and are subject to significant uncertainty. More information is included in the full TCFD report.
The challenges to get there
The reporting of greenhouse gas emissions is a new and developing area for companies and investors, and there is a wide acceptance that, at this point in time, data is inaccurate due to both a lack of coverage and standardisation of reporting. As described above, the Trustee can only currently collect data for part of the UKRF’s portfolio. At this time, there are not yet suitable assumptions and methodologies to calculate emissions where companies and investments do not report the information themselves, however these are developing, and will improve over time. In the future, the Trustee fully expects the UKRF’s reported carbon emissions to increase as data coverage and reporting improves. As such, the reported position of the UKRF’s emissions may become worse before it starts to improve.
Another challenge is the modelling and assumptions used for climate scenario analysis. At present the models fail to capture key aspects of real-world climate impacts, including sea level rises, land use changes, population movements, politics and policy, unemployment and complex feedback loops between these factors. These omissions mean the resulting scenarios could inadvertently understate the potential range of outcomes at this point in time.
The Trustee acknowledges that with better data coverage and improved methodologies and tools, it will be better able to track its progress to lower carbon emissions. Therefore, a real focus for the Trustee is obtaining as much decision-useful information as possible to facilitate accurate climate risk and scenario analysis. The Trustee sees this as essential on its journey to achieve its net zero ambition.
How the Trustee is turning its ambitions into action
The Trustee has a plan to reach its climate-related ambitions, which is structured around four areas and follows the TCFD framework. The following graphic shows the action that is currently being taken by the Trustee.
The Trustee is responding to climate change by:
- Managing risks and taking advantage of opportunities from climate change.
- Ensuring it undertakes training to improve skills and knowledge on climate change, and joins relevant collaborative organisations and discussions.
- Using influence to push for the transition to net zero, through stewardship and engagement.
- Setting objectives and monitoring the Fund's advisers, as well as the services provided by those advisers (including investment managers).
The Trustee is measuring and monitoring the impact of climate change by:
- Actively working with investment managers to enhance data quality to achieve improved data coverage.
- Selecting metrics to monitor and identifying actions to take, like engaging with investment managers and considering alternative investment options.
The Trustee has developed an action plan for climate change by:
- Assessing the impact of climate risks on the UKRF's climate and investment policy.
- Integrating environmental, social and governance (ESG) considerations and climate into the UKRF's investment processes, and avoiding certain risks like cluster weapons.
- Using models to understand how different climate scenarios could impact the UKRF's investments over time and identifying areas of focus and potential actions to take.
The Trustee is managing risks and opportunities from climate change by:
- Integrating climate change within the UKRF's risk management framework.
- Considering climate when setting strategies, selecting investment managers and monitoring ESG and stewardship activities.
- Using active stewardship of investments, including engagement and disclosure, to influence better management of climate change.
More about the metrics
The UKRF has nine sections with total assets of approximately £27 billion at 30 September 2022, broadly split between £25 billion in the Defined Benefit (‘DB’) section of the Fund and £2 billion in the Defined Contribution (‘DC’) section. You can find more information about the different sections of the Fund here.
The Trustee has selected the following four metrics to assess the UKRF’s climate-related risks and opportunities. The results from the metrics are a snapshot of the UKRF’s position at 30 September 2022 based on the data available at that time. The results for the DC section only relate to the default investment fund, which equates to over 70% of the value of the DC investment assets.
Metric: Data Coverage
For the Trustee to ensure, as far as they are able, that decisions are informed by robust and accurate emissions data.
For the Absolute Emissions and Carbon Footprint metrics: 63.6% is sourced from either an emissions data provider or the investment manager.
For the remaining 36.4% of the portfolio, data is currently unavailable.
For the Absolute Emissions and Carbon Footprint metrics: 100% of data currently available
Metric: Absolute Emissions
For the Trustee to understand the total emissions derived from the UKRF’s investments.
Responsible for 300,459 tonnes of CO2 equivalent emissions, based on assets for which useful data was available.
Responsible for 9,203 tonnes of CO2 equivalent emissions, based on assets for which useful data was available.
Metric: Carbon Footprint
For the Trustee to understand the amount of CO2 equivalent emissions derived per £million of the UKRF’s investments, weighted to take account of the size of the investment made – this is also known as emissions intensity. This is because a larger scheme will have higher total emissions but may be less exposed to risk than a smaller scheme. This also enables comparison to global benchmarks.
Responsible for emissions per £million invested of 50.7 tonnes.
Responsible for emissions per £million invested of 46.6 tonnes.
Metric: Science-Based Targets initiative (SBTi) portfolio coverage score
For the Trustee to consider alignment with the Paris Agreement emissions pathway – this means the issuing company behind each investment has a science-based net zero target in place and are reducing their carbon emissions at a rate needed to reach 50% reductions by 2030 and net zero by 2050.
35-40% of the c.£5.9bn public equity and credit investment holdings, within the c.£25.4bn DB portfolio have a science based net zero target in place.
4.9% of the c.£210m public equity and credit investment holdings within the c.£1.1bn UKRF Diversified Growth Fund have a science based net zero target in place.
The above table includes only a summary of metric data, full data along with additional explanation can be found in the full TCFD report here.
The Trustee’s strategy is evolving
Information on climate-related risks and opportunities is evolving quickly. The Trustee recognises that the data is not where it needs to be, but the urgency of climate change means it cannot wait until the full set of data is available.
In the meantime, the Trustee is focused on enhancing its data and reporting as data availability, methodologies and analytical tools develop. The Trustee expects to widen the scope of its target to include emissions of more of the UKRF’s portfolio within the metrics in its next TCFD report.
To find out more about the Trustee’s approach to climate-related risks and opportunities, view the full TCFD report.