TCFD Temperature Metric Must be “Decision-Useful” – Railpen

Eight UK asset owners call for less “prescriptive” implied temperature rise methodology; Railpen outlines net-zero 2050 roadmap.

The Task Force on Climate-related Financial Disclosures (TCFD) needs to make sure its proposed metrics for investors measuring their portfolio emissions and temperature alignment are relevant to asset owners. This is according to Chandrashekhar Gopinathan, Senior Investment Manager at UK pension fund RPMI Railpen (£32 billion in AUM), one of eight signatories to a letter responding to a consultation on climate metrics which closed last week.

“TCFD needs to ensure that the implied temperature rise (ITR) metric is not too rushed or oversimplified. It needs to be rigorous and the output needs to be practical and decision-useful,” Gopinathan told ESG Investor.

Railpen co-signed a letter prepared by the global asset owner-led Transition Pathway Initiative (TPI), which was sent in response to two public consultations published by TCFD. The first proposes updates to existing guidance on climate-related metrics and data, whereas the second is an assessment on current market developments for future-looking metrics, such as the ITR.

The ITR is proposed as a metric to be used by asset owners and other users of the TCFD climate-risk reporting framework to measure and disclose the alignment of their portfolios – and individual underlying investments – consistent with a 2°C or lower temperature pathway. At the same time, asset owners would incorporate forward-looking alignment metrics into their target-setting frameworks and management processes.

This would work by taking a benchmark-divergence approach, translating each investee company’s overall alignment (or lack thereof) into a single temperature score. If a company logs a temperature score above 2°C, then that indicates the company is exceeding its share of the global carbon budget. Responsible investors that want to ensure investees are Paris-aligned will likely take action through engagement, escalation to voting or divestment.

The consultations do not outline the core steps that need to be followed by companies in order to produce such a metric, Railpen’s Gopinathan pointed out.

Ensuring a just transition

In their collective response, asset owners stated that the proposed new requirement is “both overly prescriptive and not reflective of current practice”. However, signatories acknowledge that there is a need for action in this area so that “robust, decision-useful tools and metrics are developed”.

The letter added that the ITR “has the potential to create wide misunderstanding and to drive the carbon washing of portfolios”. This would make it more challenging for asset owners to hold a portfolio of transitioning assets in carbon intensive sectors, thus preventing a just transition, even if those companies are making good progress in their transition efforts.

“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 letter noted.

The original timeframe for the consultations also left “very little time for asset owners to digest the information and respond”, Gopinathan added. The consultations were published on 7 June, and the original deadline of 7 July was extended until 18 July.

Doubts as to the feasibility of an ITR were also expressed by the Bank of England in a May report, which noted that the current generation of measures remains “very sensitive to assumptions” which risks complicating their use in “operational decision-making”.

“Some issues are inherent to ITR metrics, and may not be eliminated entirely by methodological improvements. For example, they require a large number of assumptions about the nature and credibility of constituent firms’ future emissions paths, and can be sensitive to small changes in these assumptions,” the report said.

Signatories to the TPI-led letter have offered to work with the TCFD to map out steps that need to be taken to develop an appropriate and effective implied temperature metric.

Other asset owners who signed the letter include the Church of England Pensions Board, Brunel Pension Partnership and Border to Coast Pensions Partnership.

TPI is a global initiative assessing companies’ preparedness for the transition to net zero. It’s currently backed by 90 investors with US$23 trillion in AUM.

Railpen sets out Net Zero Plan

Railpen, one of the UK’s largest pension funds with 350,000 members, has also published its Net Zero Plan this week, outlining its decarbonisation strategy to reach net-zero by 2050. Railpen has pledged to halve its carbon emissions by 2030, primarily through corporate engagement and ensuring all investee companies are Paris-aligned.  

“The roadmap has a current engagement target with issuers responsible for 70% of portfolio material financed emissions and, by 2030, increasing to issuers contributing 90% of portfolio material financed emissions,” Railpen said. 

The plan currently covers Railpen’s 65% of investments, including corporate fixed income, sovereign bonds and listed equities. It will further evolve to include real estate, infrastructure holdings and private equity over the course of this year and 2022.  

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