UK pension fund prioritises engagement on carbon disclosures after data availability constrains efforts to decarbonise portfolios.
Carbon-related disclosures will be a key focus of engagement in 2021, following disappointing levels of reporting from investee companies, according to Brunel Pension Partnership. The UK local government pension fund, with £30 billion in assets under management, said lack of transparency has had a direct impact its ability to measure Scope 3 greenhouse gas (GHG) portfolio emissions.
Having combining its underlying equities portfolios into a single Aggregate Portfolio for assessment purposes, Brunel found it only had access to fully-disclosed carbon data from investee companies for 61% (determined through a carbon weighted method) and 56% (determined through an investment weighted method) of its portfolio holdings, according to its latest ‘Carbon Metric Report’.
In the event of partial disclosure or non-usable data, Brunel relied on proxies and estimates from data provider S&P Trucost.
“We recognise that Scope 3 emissions remain far from universal due to a lack of general disclosure,” a Brunel spokesperson told ESG Investor.
The current rate of corporate carbon disclosures provided indicates “scope for improved reporting among investees”, the report noted.
Scope 3 emissions are indirect emissions from activities and sources an organisation doesn’t directly own or control, such as investments as well as emissions from supply chains and use of products and services by end consumers. This doesn’t include utilities, like electricity, which are purchased and used by the organisation (Scope 2).
While disclosure of Scope 1 and 2 data by large corporates is becoming increasingly common, availability of Scope 3 data is far less consistent. If asset owners are not able to access accurate data on the carbon footprint of their underlying investments, it has a knock-on impact on their ability to reduce their own Scope 3 emissions.
“The investments we oversee form the greatest contribution to our Scope 3 emissions and we have undertaken considerable work to decarbonise our portfolios, with the ambition of being net-zero by 2050,” the spokesperson said.
Despite the lack of full transparency on Scope 3 emissions within its portfolios, Brunel has nevertheless outperformed its benchmark of reducing emissions from equity portfolios by at least 7% per annum.
To track its progress on reducing portfolio emissions against the market average, Brunel formulated a “meaningful comparator” custom benchmark for the Aggregate Portfolio, based on common benchmarks, such as FTSE All-Share ex-IT, MSCI World and MSCI Emerging Markets. The benchmark has been weighted by investments as of December 31 2020.
When measured against the custom benchmark, the Brunel Aggregate Portfolio is less exposed to fossil fuel revenues (1.4% versus 2.2%) and future emissions from reserves (24.8 mt/CO2 versus 46.2 mt/CO2), the report said.
The portfolio with the highest carbon intensity within the Aggregate was the Brunel Passive Smart Beta (419 mt/CO2), while the lowest carbon intensity was reported by the Brunel Global High Alpha (143 mt/CO2).
Each portfolio was assessed for its individual Weighted Average Carbon Intensity (WACI), as of December 31 2020, which is a measure recommended by Task Force of Climate-related Financial Disclosure (TCFD) guidelines. As of December 2020, the Brunel Aggregate Portfolio has an efficiency of 15.4% over 2019, giving it an overall efficiency of 22% versus its custom benchmark.
In an effort to meet its net-zero by 2050 target, Brunel has committed to using the Net Zero Investment Framework, launched by the Institutional Investors Group on Climate Change (IIGCC) in March 2021, alongside 22 other asset owners managing US$1.2 trillion in assets.
In an effort to encourage corporate action on climate issues, the Outcomes Report noted that Brunel engaged 558 times with corporates on climate-related issues such as disclosure in 2020.
“Our ambition is to provide leadership on climate investing and, through that leadership, to help transform the industry to make it fit for a Net Zero world. We all know how urgent the problem is and how much finance needs to be part of the solution. Brunel is a strong advocate for global mandatory disclosure to TCFD, and we hope this report demonstrates that commitment,” said Faith Ward, Brunel’s Chief Investment Officer.