Pension funds are still confused about how to follow Task Force on Climate-related Financial Disclosures (TCFD) reporting, with many claiming that clearer guidance from the UK government is needed, according to a recent report.

Pensions for Purpose has released a new white paper sponsored by consultancy Redington which revealed that most pension funds are not yet using TCFD to inform and drive their climate investment strategies.

It also showed that 75% of pension funds use investment consultants to interpret data for TCFD reporting, while the remainder either ask their asset managers for the data or go directly to data source providers for improved data integrity.

The research revealed the importance pension funds place on the proper training of board members on climate risk management, but found challenges persist around unreliable or limited data, credibility of carbon offsets and inconsistent metrics between asset classes.

Karen Shackleton, chair and founder of Pensions for Purpose, said: “Many pension funds stress the importance of training the board on climate risk management, with investment consultants often being seen as the best trainers.”

Anastasia Guha, global head of sustainable investment at Redington, said: “Climate risk is an investment risk in the portfolio – that’s why the regulations were put in place – to get pension funds to use the TCFD framework to uncover what level of climate risks they are exposed to and set targets to reduce these.

”However, it’s easy to fall into a compliance mindset so we encourage asset owners going through the TCFD process to always concentrate on what matters most, to look for actionable data and advice in this area, and not to let this become an expensive box-ticking exercise.”

The paper, which addresses the four critical areas of TCFD regulation (Governance, Strategy, Risk Management, and Metrics and Targets), attempts to give the perspectives of pension funds that have taken on the reporting process, to share insights on challenges and issues being faced and to explore how output is being used by funds.

For governance, it is important to provide training to trustees, as well as ensuring the right choice is made with respect to data collection and interpretation by using experts to maximise efficiency, according to the report.

For strategy, the data output of TCFD is not yet influencing investment strategy for most funds. Scenario analysis has also not yet evolved to have more than a limited application. Investments in climate solutions with carbon offsets need to be communicated but are being kept out of accounting measures at present.

It has been pointed out that risk management is not proportional to the efforts being undertaken to calculate risk. Highlighting material risks to funding is something that pension funds can certainly consider, the paper stated.

Pension funds, it added, should also compare the risk of omitting portfolio emissions data versus the risk of estimating it. “In our view, the risk of omitting far outweighs the potential for inaccuracy that comes with estimation,” the paper said.

Finally, although it has been limited thus far, it may be valuable to seek assurance from data providers, the report suggested.

In the metric and targets section, there are clearly issues with data quality and coverage. However, an important element is targeting forward-looking metrics to assess how a fund fits into a net-zero world.

Funds should ensure they consider the pros and cons of the different forward-looking metrics. Member engagement with the TCFD report is likely to be limited, given they are often long documents restricting the capacity for lay understanding.

Funds are more likely to increase member engagement around climate action if they extract insights from their TCFD reports and communicate these in other ways, according to the paper.

To read the digital edition of IPE’s latest magazine click here