The Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations for a standardised reporting framework are gaining traction with over 500 organisations now officially supporting the voluntary scheme for companies and investors to report climate-related information in their financial holdings.

TCFD, which was set up in 2015, involves a long, often challenging, process of integration that can span three years or more.

Speaking at the Principles for Responsible Investment’s Climate Forum in London, Jennifer Anderson, investment officer for the United Kingdom’s £10 billion ($12.77 billion) TPT Retirement Solutions, formerly the Pensions Trust, explained the pension fund’s progress and challenges on its TCFD journey.

Firstly, TPT defined its climate beliefs and placed oversight of climate change strategy with its investment committee. The fund also publicly committed to reporting in line with the recommendations set out by TCFD and to reviewing its climate strategy on an annual basis. Anderson credits the enthusiastic approach to TPT’s enlightened trustee leadership which began looking at climate change back in 2011.

In a second step which involved working with Mercer and other experts, TPT began to look at how it would integrate climate change into its investment strategy across different asset classes.

A third pillar has involved integrating climate change into the fund’s risk management processes. Limited internal resources and evolving risk metrics have made this element of TCFD compliance the most challenging, said Anderson. Translating data into risk metrics that can be presented in a way the trustee board understands, particularly around the impact on funding values, is difficult. In addition, using the various tools on offer has been costly and, therefore, unsuitable for regular use.

“We need to run analysis ourselves as part of portfolio management systems,” she said.

Anderson also noted challenges around the TCFD’s target setting requirements and a lack of clarity around what characterises a “meaningful target.” Moreover, the fact that TCFD reporting is voluntary, and not backed by regulation, has contributed to lacklustre member interest and engagement in the process. “We are committed to report in line with recommendations but who is it for,” she asked.

A hallmark of the TCFD’s disclosure framework is the recommendation that organisations provide climate-related financial disclosures in their main annual financial filings, and that companies treat the reporting of climate-related issues in the same way as any other material information. Yet, Anderson noted that positioning the long, detailed report within the pension fund’s annual report and accounts puts climate risk “out of kilter” with other risks. However, partnering with other asset owners and closely working with the fund’s asset managers has proved essential to the process, she said. All TPT management is outsourced and assets are split between a liability-matching allocation (40 per cent) and a growth allocation (60 per cent). The growth allocation is divided into five sub-portfolios, and equity accounts for around a quarter of the growth allocation.

Hermes, the asset manager with £33 billion ($42 billion) under management and a global reputation for ESG, works with investee companies to align their disclosure practices with TCFD recommendations.

Hermes has an engagement team of 25 to 30 people within which different groups set targets on engagement, said Christine Chow, director at Hermes Equity Ownership Services (EOS). In an important milestone, earlier this year the asset manager ran a workshop for China’s oil and gas giant Sinopec on TCFD recommendations and discussed how the company could analyse its portfolio resilience to a number of relevant low-carbon scenarios. Hermes reports the carbon footprint of around 90 per cent of its AUM; the asset manager has also recently developed a carbon tool to better understand concentration of carbon emissions, rather than use a third-party tool, she said.

Indeed, tools and the ability to access the information needed to incorporate TCFD recommendations and navigate the energy transition is a shared challenge for investors; a key TCFD recommendation asks for forward-looking analysis to assess how investors’ exposure to climate change-related risks and opportunities might impact on portfolio performance over time.

One of the latest tools on the market is the free-to-use, online PACTA tool developed by the 2⁰ Investing Initiative for assessing climate-transition risk in equity and bond portfolios. Significantly, the tool allows investors to see the gap between their existing portfolio and two-degree benchmarks, explained Clare Murray, an analyst at 2⁰ Investing. The tool focuses on the power, coal mining, oil and gas and auto sectors, responsible for 80-90 percent of carbon emissions from listed equity markets, she said.

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Sarah Rundell is a staff writer for Top1000funds.com based out of London. She writes on institutional investment across all asset classes, global trade and corporate treasury.