TCFD recommendations ‘lack feasibility for pension funds’

Technical gaps and weaknesses risk “carbon washing” of funds, warns the Transition Pathway Initiative

July 23, 2021

UK-based asset owners have warned that the Task Force on Climate-related Financial Disclosures (TCFD) portfolio alignment proposals could undermine efforts to transition to a low carbon economy.

The letter from the Transition Pathway Initiative (TPI), signed by eight pension schemes and local government pension asset pools, says that climate alignment metrics for reporting may result in investment decisions that compromise their duty to beneficiaries and the environment.

The TCFD recently ran two consultations focusing on forward-looking climate metrics and recommended that asset owners “measure and disclose the alignment of their portfolios consistent with a 2°C or lower temperature pathway” and incorporate forward-looking alignment metrics.

However, the TPI’s letter stated that the recommendations may not act in the interest of pension funds or efforts to reduce greenhouse gas emissions.

“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.

The group said that, while they saw the attraction of the TCFD’s proposals for fund managers looking to develop and market green products, the benefits do not extend to asset owners that have “very different duties, interests and responsibilities”. 

Particularly, the use of an implied temperature rise 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.”

While the investors said that they very much backed the principle of portfolio reporting, the TCFD consultation documents contained sizeable technical weaknesses and gaps and have offered to work alongside the TCFD to develop a more rigorous understanding of portfolio alignment metrics and measures.

The letter is signed by representatives from the Universities Superannuation Scheme, Church of England Pensions Board, Church Commissioners for England, Brunel Pension Partnership, RPMI Railpen, Border to Coast Pensions Partnership, Lothian Pension Fund, and the BT Pension Scheme.

The investors’ concerns come at a crucial time for UK pension funds, as the government prepares to roll out new rules requiring them to report in line with TCFD recommendations.