Responses to a UK government consultation on mandatory portfolio alignment metric disclosure by pension schemes are coming in, with industry organisations such as the Association of Consulting Actuaries (ACA) and the UK Sustainable investment and Finance Association (UKSIF) expressing support while pointing out the need for clarification of the purpose of portfolio alignment metrics.

In October, the Department for Work and Pensions (DWP) set out proposals to require pension schemes to calculate and disclose a metric setting out the extent to which their investments are aligned with the goal of keeping global warming to within 1.5°C above pre-industrial levels.

The consultation, which closed yesterday, was also about draft guidance covering expectations for how trustees should report on implementation of climate change and stewardship policies.

At the Association of Consulting Actuaries (ACA), Stewart Hastie, who leads the ACA’s climate risk group, said the association supported the introduction of a new mandatory portfolio alignment metric “as an informative and important tool for pension trustees in managing forward-looking climate risks compared to the backwards looking emissions based metrics”.

“However, the guidance should emphasise the importance of the actions being taken within the underlying assets to de-carbonise rather than just whether a long-term net zero target has been announced.”

The ACA also recommended that the calculation and disclosure of other additional metrics could now fall under the ‘should’ criteria rather than ‘must’.

James Alexander, the UKSIF’s chief executive officer, emphasised that DWP’s final guidance, and ministers publicly, should continue to reiterate that the true intention of a pension scheme’s portfolio alignment metric is not for a scheme to meet a mandatory 1.5°C aligned target by a certain date.

Instead, it is to show “investments’ evolutionary progress over time towards this goal,” Alexander stated.

The UKSIF also noted that the DWP should continue to “reiterate the vital important of investors’ stewardship role and reflect this in its final guidance, while warning of the dangers of an exclusive focus on divestment by schemes to improve their portfolio’s temperature alignment rating”.

Missing pieces

The Society of Pension Professionals (SPP) is also broadly supportive of the DWP’s proposal, on the condition that the portfolio alignment metrics are “meaningful, well defined, and measurable in a consistent and repeatable way over the required time periods”, and that they can be acquired without unreasonable cost to pension schemes, their advisors or investment managers.

SPP also noted a concern over the availability of climate-related data and said that a lack of standardisation in methodologies for gathering and measuring such data could be a significant issue for trustees, posing a barrier to schemes meeting this requirement.

“Most UK pension schemes’ investment portfolios are highly diversified and global in nature, which presents an obstacle to gathering the required data in a consistent, comparable, and meaningful way,” said the SPP.

“While outside the scope of this consultation, we would encourage the government and the UK regulatory community to work with regulators in other jurisdictions to improve Task Force on Climate-related Financial Disclosures (TCFD) reporting by companies at a global level.”

“We feel greater attention on adaptation and physical risk is required”

Cadi Thomas, head of ESG research at Isio

Cadi Thomas, head of ESG research at consultancy Isio, supports the effort to sustain momentum but feels the DWP may have missed a vital piece of the puzzle.

She said: “[W]e note that the current focus remains on decarbonisation and transition risk. We feel greater attention on adaptation and physical risk is required, in alignment with the programme set out in the Glasgow Pact to advance the global goal on adaptation.”

She said that given this is the “missing piece of the puzzle” in an industry-wide response to climate change, any evolutions in TCFD guidance could consider turning their attention to physical resilience.

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