Recommending portfolio climate alignment metrics for reporting could force asset owners to make investment decisions that compromise their duty to beneficiaries, a group of UK pension investors has warned in response to a consultation by the Task Force on Climate-related Financial Disclosures (TCFD).

In a letter, the investors also relayed their “most fundamental concern” that the TCFD’s proposals would drive decisions that could undermine efforts to transition to a low carbon economy.

Sent by the steering committee of the Transition Pathway Initiative (TPI) today, the letter is signed by its chair, Adam Matthews of the Church of England Pensions Board, and individuals at eight pension schemes or asset pools, including the heads of responsible investment at BT Pension Scheme and Universities Superannuation Scheme, the UK’s two largest pension funds.

The TCFD has been looking more closely at the use of forward-looking climate metrics by financial markets, and ran a consultation on this from October last year to January 2021. In June, it followed up on this with a consultation about proposed guidance on climate-related metrics, targets and transition plans.

Its proposals included changing the 2017 TCFD guidance to recommend that asset owners “measure and disclose the alignment of their portfolios consistent with a 2°C or lower temperature pathway (e.g., Paris-aligned), and incorporate forward-looking alignment metrics into their target-setting frameworks and management processes”.

TCFD’s consultation, which runs until a recently extended deadline of 18 July, also includes a supplement with recommendations for measuring the alignment of portfolios with climate goals.

“We remain concerned that the TCFD’s proposals seem to have been developed without consideration of the feasibility and cost versus the benefits for pension funds or asset owners”

The UK is aiming to make TCFD-based disclosures mandatory across the economy by 2025. New regulations are already in force for pension funds.

In their letter, the investors – who said they consulted extensively with other asset owners – said this portrayed the implied temperature rise metric as more sophisticated and more relevant, a characterisation they disagreed with. Implied temperature rise metrics involve capturing the consequences of an assessed alignment in the form of a temperature score.

The investors said they strongly supported the principle of portfolio alignment, but that assessing this “remains very much a work in progress” and that the TCFD consultation documents contained significant gaps and technical weaknesses.

They also said adopting portfolio alignment metrics “will have a series of undesirable consequences for asset owners potentially forcing them to breach their fiduciary duties, imposing significant additional costs on asset owners”.

“We remain concerned that the TCFD’s proposals seem to have been developed without consideration of the feasibility and cost versus the benefits for pension funds or asset owners,” they said.

“We see the attraction of the TCFD’s proposals for fund managers looking to develop and market green products, but do not see the same benefit for asset owners that have very different duties, interests and responsibilities.” 

In the TPI investors’ view, the use of implied temperature rise metrics in particular could harm efforts to stem greenhouse gas emissions. They said the metric “has the potential to create wide misunderstanding and to drive the carbon washing of portfolios”.

They added: “It would become increasingly difficult to hold a portfolio of transitioning assets in high carbon intensive sectors, even if those very same companies had been responsive to investor engagement and made credible and independently verified net zero aligned targets that were consistent with the transition.”

“Given that these are the companies and assets we need to transition, such an outcome seems perverse and, presumably, not the intention of the TCFD’s proposals.”

The investors suggested that the TCFD’s proposed recommendations be reworded “so that additional reporting requirements are introduced for asset owners only at the point when such reporting is practical, cost-effective and generates decision-useful information”.

They offered to work with the TCFD to develop “a more rigorous approach to and understanding of portfolio alignment metrics and measures”.

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