2020/21 | Climate Change Report

Climate Change Report 2020/21

About the PPF Protecting people’s futures Our purpose is to protect the future of millions of people throughout the UK who belong to defined benefit pension schemes. When these schemes fail, we’re ready to help. We do this by paying our members, by charging a levy and by investing sustainably. Our work has a real impact on people’s lives, so whatever we do, we strive to do it well, with integrity and with their future in mind.

Contents Executive summary 3 Progress at a glance 2020/21 4 Our commitment to the TCFD 5 Governance 6 RI governance at the PPF 6 Upholding our RI strategy 6 Strategy and risk management 7 Our climate-related risks and opportunities 7 The impact of climate on our strategy 7 How we assess the risks 7 Managing climate-related risks across the PPF 8 Summary of our progress across all asset classes 9 Metrics and targets 11 Absolute carbon emissions 11 Carbon footprint metrics 11 Relative carbon intensity 12 High carbon-impact sectors 13 Disclosure rates and data quality 13 Exposure to fossil fuel activities 14 How we calculate forward-looking scenario analysis 15 Our aspirations 16 Appendices 17

Executive summary Climate change is one of the biggest issues on the global agenda Our achievements – one that has the potential to impact economies, businesses and people everywhere. We’re committed to managing these risks and 2019 opportunities across our investments on behalf of our members. This focused climate report shows how we are active in assessing Climate change policy and strategy approved by the Board and managing climate-related risks and opportunities across our Independent carbon audit of our listed equity and credit portfolios investment portfolio. It details our climate-related governance Minimum Environmental, Social and Governance (ESG) and carbon requirements integrated framework, strategy, risk management processes and chosen in fund legal documents metrics, aligning with the Financial Stability Board Task Force on TCFD disclosures reported in our Annual Report and Accounts Climate-related Financial Disclosures (TCFD) framework. 2020 First dedicated Responsible Investment (RI) report published Our climate change Climate measurements embedded into our portfolio management systems (see page 7, 9) strategic journey ESG and carbon reporting template mandated for external managers – 100 per cent of our Liquids managers now report this way (see page 9) We will continue to refine our processes and set new standards Stewardship services expanded to cover our in-house fixed income and cash books (see page 9) Step 1 Recognise and understand Step 2 the challenge facing us. 2021 Build out risk management, Step 3 monitoring and reporting New climate-aware equity benchmark designed to meet our investment strategy while processes. Evaluate results and determine 1 action points. reducing our exposure to climate risks by at least 50 per cent (see page 10) Refine processes as required, Innovative pilot project launched to develop an approach for assessing the Paris Agreement incorporating new data/methods. alignment of all our asset classes (see page 8) Next steps We see our climate strategy as fundamental We believe our achievements to date significantly reduce the risks facing our portfolio, without to our long-term investment goals. We can compromising our underlying investment strategy. Now we have better access to data and insight, reduce risk, ensure we are sustainable and we will keep evaluating and determining actions we can take to mitigate these risks further. provide industry-leading transparency. We will continue to take a leadership role as we refine our processes further and set new standards in other asset classes where access to data and tools is still scarce. Oliver Morley Chief Executive O昀케cer 1 When compared to FTSE All-World Index carbon emissions and reserves intensity

Progress at a glance 2020/21 Enhanced our governance Improved our portfolio Improved our own Continued to collaborate and strategy by: and risk management oversight by: with the industry by: processes by: Addressing ESG and Finalising a climate-aware Expanding our ability to Responding to the DWP’s climate-related risks in our version of our equity produce TCFD-related metrics consultation on climate risks investment risk register benchmark and analysis Deepening the reporting provided Launching an innovative Rolling out new ESG and carbon Participating in the Institutional to our oversight committees project to assess how our whole reporting requirements for our Investors Group on Climate Change portfolio aligns with the external fund managers and achieving (IIGCC) Paris Aligned Investment Paris Agreement a 100 per cent response rate across Initiative (PAII) and joining its new our Liquids portfolio Net Zero Stewardship working group

Our commitment to the TCFD Taking action on climate change Considering the impacts of climate change on our investments is one of our three key priorities within our RI strategy. We’re committed to: 1. Implementing 2. Assessing transition the TCFD and physical risks We’re continuously applying We’re taking a phased approach to and implementing TCFD analysing how exposed our portfolio recommendations, always is in the global transition to a low looking for ways to improve risk carbon economy, as we’re bound by management and transparency. data availability. We’re also starting to consider the physical risk factors of climate change across all asset classes, although again, the data on this is nascent. The TCFD guidance was created to help companies and We’ve formally 3. Engaging with our 4. Collaborate with investors voluntarily disclose climate-related 昀椀nancial supported the fund managers industry risks clearly, consistently and reliably to help lenders, TCFD framework insurers and investors make informed decisions. since 2018. We’re working tirelessly with We’re engaging and collaborating our fund managers across all with industry peers and the wider We’ve formally supported the TCFD framework since strategies and regions to ensure investment community on climate 2018 and have continually implemented it across our they consider, manage and report change initiatives and furthering best investment process. We’ve shared our progress in our to us on the climate-related risks practice, including support for the and opportunities our investments Paris Agreement, TCFD and Climate Annual Reports, along with our annual RI reports, which might face. Action 100+. also detail our stewardship activities and work as an active owner.

Governance RI governance at the PPF Our climate change policy New internal RI reports Climate change is a systemic and This year the ESG team developed a Upholding our Inadequate governance is often a factor in schemes entering the PPF, therefore we have a responsibility to non-diversi昀椀able concern, which can new quarterly RI update report for the RI strategy exemplify good governance on behalf of our members and levy payers. signi昀椀cantly a昀昀ect the value of our Investment Committee. The report Our RI strategy and framework investments across the short, medium reviews our RI policies, processes and incorporates ESG risks and and long term. policy review schedule. It provides opportunities across our entire updates on stewardship, manager investment portfolio, with an PPF Board Highest governing body with oversight of RI (including It also presents opportunities for appointments and monitoring, and key essential focus on risk management. climate-related) issues. companies and assets that are well- quantitative metrics such as ESG scores It’s implemented by the Investment positioned for the transition to a low- and carbon intensity by asset class. and ESG teams and overseen by carbon economy. We also provide updates on the management of our climate-related the CIO. Investment Responsibility for developing and maintaining the Fund’s In 2019, we 昀椀nalised a speci昀椀c climate and other ESG risks monthly with Identifying our exposure Committee (IC) RI principles and policies (including climate-related) is change policy (see Appendix 1) that the CIO and the Head of Investment and determining appropriate delegated to the IC. outlines our approach to these risks Strategy. We highlight portfolio-relevant management of climate-related risks and opportunities. information or events in our daily in our investments is a strategic investment meetings as they arise. priority for the PPF, as a speci昀椀c area Investment Led by the Chief Investment Officer (CIO). Responsibility for of focus within our Strategic Plan. Team ensuring adherence to the RI framework and associated Taking action: The Investment It is vital to our RI approach that policies (including the integration of climate change) across Committee reviewed this policy Taking action: New quarterly we engage with and advance the ESG Team all asset classes, both internally and externally managed. in 2020/21 as part of its annual reports mean we have greater ESG practices of our external review cycle. transparency than ever before. fund managers, bringing them The ESG Team, as part of the Investment Team, provides on the journey with us. We support and expertise, oversees appropriate implementation New Statement of Developing a new stewardship continuously review all existing of the RI framework, engages with portfolio managers, Investment Principles policy and potential managers’ policies, and monitors investments for ESG risks and opportunities A new stewardship policy was ESG integration processes and (including climate-related). This year we chose to update our reporting to ensure they meet our Statement of Investment Principles developed during the year and evolving minimum standards. We (SIP), in line with the DWP’s amended approved by the Investment Committee will not allocate more capital to occupational pension schemes in March 2021. managers that fall short of these regulations, to advocate best practice. standards. This year, we carried Within the new SIP, we included ESG This policy outlines our approach to this out with an increasing focus and climate risks into our investment stewardship – including how we engage on climate, including in the more risk register. The updated statement with our fund managers and underlying challenging private markets assets. Our investment committee Our Investment and ESG teams also outlines our stewardship approach, issuers around the management of climate-related risks – as part of Overseen by our Board, the Investment Committee develops Our Investment team manages over half our assets internally, taking 昀椀nancially material considerations For more detail on this, see page 9. our investment principles, strategy and risk management while we appoint external fund managers for the remainder. – particularly climate change risks – into managing the Fund, in line with the approach, including our RI principles and policies. Every asset class is managed in line with our RI strategy and account across our investments. It also new SIP. under the stewardship of the Investment Committee. details how we monitor external fund As part of its oversight function, the Investment Committee managers and outlines the RI beliefs requires evidence of the implementation of our RI processes. Within the Investment team, we have a dedicated group of which drive our strategy. The Committee also reviews our policies annually to ensure ESG specialists. This ESG team works extensively with our Taking action: The new they stay relevant and ambitious. internal portfolio managers and external fund managers stewardship policy guides how to monitor our portfolio – in line with leading disclosure we engage with managers and frameworks – and reports to the Board, Investment Taking action: Including ESG issuers on climate-related risks. Committee, and Asset and Liability Committee on and climate risks within our SIP reflects our ambition to our progress. promote industry best practice.

Strategy and risk management Our climate-related How we assess the risks Assessing transition risks risks and opportunities As they are most widely available to us, we’re currently using the following modelling tools, methodologies and We have started to monitor the risks forecasts to consider transition risks: We’ve embarked upon identifying within our investment portfolios using the types of climate-related risks and a number of di昀昀erent ESG tools and • International Energy Agency (IEA) opportunities that could impact our carbon-speci昀椀c datasets. Although we scenarios (from its Energy Technology investments. still have a way to go, we have worked Perspectives report) available through hard this year to access more data on the Transition Pathway Initiative (TPI) Most of our material exposure ESG and climate metrics. and the Paris Agreement Capital to climate-related risks exists in Transition Assessment (PACTA) tools As a result, we have ESG data available downstream ‘昀椀nanced emissions’ through our portfolio management • The PRI’s Forecast Policy Scenario in our investment value chain. As a system for 70 per cent of the Fund’s under its Inevitable Policy Response result, we’re focusing our strategy and net asset value. Within this coverage, risk management on these 昀椀nanced we also have carbon emissions data for • MSCI ESG’s Portfolio Climate Value-at- emissions, as recommended by the approximately 30 per cent of the total – Risk (VaR) Greenhouse Gas Protocol Scope 3 Calculation Guidance. the lower carbon coverage re昀氀ects the For more detail on these methods, see di昀케culty in assigning sovereign carbon page 15. emissions. To drive further visibility, we’ve chosen to focus on each asset class in turn and in a way that works Certain risks can have di昀昀erent best for each. likelihoods or magnitude of impact, depending on the We also expect our external fund asset class. managers to understand and integrate Some examples of the risks material climate-related risks into their we’ve identified include: analysis and investment process. Where possible, we ask them to provide carbon footprinting and scenario analysis of • Transition – risks that may The impact of climate We believe that a disorderly transition transition risks, consider exposure to impact company earnings in Scenario A, or Late Action: physical risks and engage with issuers, the shorter term, e.g. policy on our strategy to net zero is likely to have a di昀昀erent if feasible. We discuss how we have risks arising from carbon impact on assets than an orderly A sudden disorderly transition to worked with our managers on this on pricing or taxes. transition. We also feel it is prudent to a temperature rise of below page 9. consider a failed transition scenario too. 2°C by 2100. • Technology – risks and It’s extremely complex to identify and For our listed corporates, we’ve Scenario B, or Early Action: opportunities as companies assess climate-related impacts on our decided to assess the risks posed An orderly transition in line with develop, or don't adopt, business plans, strategy and 昀椀nancial by global warming across the three the Paris Agreement that limits Taking action: We have worked superior technology to build planning. To overcome the barriers, hard this year to access more industry-based solutions. we have chosen to use a wide range of di昀昀erent climate exploratory scenarios global warming to 1.5°C or below metrics and techniques. We also remain recommended by the Bank of England’s 2°C by 2100. ESG, carbon emissions and other • Physical – risks in the medium adaptable to using the most advanced 2019 Stress Test Methodology and climate data. to long term that may impact and relevant analytical tools currently its subsequent 2021 Climate Biennial Scenario C, or No Additional assets, e.g. infrastructure and available. Exploratory Scenarios. Action: property in certain locations. Although 2100 is further out than our Continuation of current trends, Our scenarios expected liabilities, we acknowledge with little-to-no transition, • Opportunities – there are Although the DWP’s climate risk that the transition and physical leading to at least 3–4°C rise in opportunities within some temperature by 2100. asset classes, e.g. sustainable proposals guided that two scenarios risks under di昀昀erent scenarios are forestry assets that offer a should be included as a minimum, we likely to impact our assets much viable nature-based solution to have chosen to select three scenarios sooner, depending on whether – climate change mitigation. under which to carry out stress testing or when – policy action is taken. of our assets.

Strategy and risk management – continued Analysing portfolio temperature Managing climate-related In the absence of alignment risks across the PPF an existing solution, Following our involvement in the we’ve launched a IIGCC’s PAII, we’re currently undergoing a project to assess how the Fund As ESG and climate-related risks can unique pilot project aligns with a particular global warming to assess how our trajectory. signi昀椀cantly impact the long-term performance of assets, we’ve now entire portfolio We’ve found the PAII outputs a chosen to identify this as a speci昀椀c risk aligns with the useful starting point, but the current category in the investment risk register of our SIP. This means they’re monitored framework only o昀昀ers coverage for by the Investment Committee, which in Paris Agreement. less than 25 per cent of our portfolio. turn reports to the Board. As we could not identify an alternative solution to give us what we needed, On a day-to-day basis, we’re continually we’ve appointed an external consultant improving access to risk data across our to help us design one. Over the coming portfolio. We’re also active owners and year, we’ll be working together to assess stewards. Our stewardship provider our entire portfolio and acquire an and fund managers engage on our independent, objective measurement. behalf with the companies or issuers we In line with our overall strategy, we’re invest in to ensure climate-related risks taking a phased approach, with phase and opportunities are being managed one addressing 70 per cent of our appropriately. portfolio’s assets. The results of this project should help us set robust and credible climate-related objectives. We hope it will also be useful to other investors with similar exposure to more Assessing physical risks Assessing opportunities continually review the proportion of complex asset classes. Most modelling tools, such as those We believe that there are opportunities our timberland assets that are FSC mentioned on the previous page, largely for some of our real assets in a and/or PEFC certi昀椀ed. consider transition risks rather than decarbonising economy, and have • Infrastructure physical risks. To better assess physical identi昀椀ed forestry, infrastructure We see sustainable infrastructure as risk, we’ve started to explore the and property assets as a logical part an attractive opportunity, and within di昀昀erent data and analytical provider of the solution. options. However, these tend to focus this have identi昀椀ed urban resilience on listed companies’ headquartered Whilst sectors such as renewable as a key trend. locations rather than asset-level energy are clearly likely to bene昀椀t • Property locations. from a transitioning economy, we also Real estate is a critical component recognise that alternative technologies of the energy transition, not only While we continue to explore options, or materials present growing we’re also using analysis provided in opportunities in other sectors. through addressing energy e昀케ciency our MSCI Climate VaR reports, as this but also in design and construction. also incorporates some physical risks. • Forestry As part of our portfolio alignment We also continue to challenge our Forestry has a strong potential to project, we have recently started fund managers to assess physical and contribute to the mitigation of CO using the Carbon Risk Real Estate 2 Monitor (CRREM) tool to review our adaptation risks across our portfolios, emissions through carbon storage, property portfolios. CRREM is an especially in our real assets. and sustainable forestry assets are EU Horizon 2020 research project, one of a few viable nature-based the outputs of which indicate the solutions. Well-managed forests can percentage of a property portfolio also provide additional bene昀椀ts in that might become stranded by 2030 Taking action: We’re driving terms of biodiversity and be more a deeper understanding of resilient to physical impacts arising or 2050 under a speci昀椀c scenario. physical risks by challenging our from climate change. Over the year This can also help to de昀椀ne those we have increased our investment assets more likely to be resilient managers, by using Climate VaR in forestry by 20 per cent and we under net zero pathways. reports and by exploring new analytical tools.

Strategy and risk management – continued Asset class Progress in 2020/21 Next steps Working with managers to drive We believe that this engagement with Summary of our progress transparency across our portfolio our fund managers has increased their across all asset classes Direct Liability Driven Started alignment assessment; Start counterparty exposure We expect our external fund managers awareness of potential climate risks. We Investment engaged on green gilts assessments to integrate material climate-related also believe that it has already led to a risks into their analysis and investment signi昀椀cant impact on the risk pro昀椀le of UK Public credit Extended engagement services to Start alignment assessment process and update us accordingly. our managers. The following table summarises the cover listed corporate holdings; This includes carbon footprinting and progress we’ve made in each asset measured carbon footprint scenario analysis along with assessing Our Liquids managers are now class on striving to manage our UK Private credit Climate-related questions in due Start alignment assessment physical risks, where possible. We preparing to share additional metrics climate-related risks over the year. diligence and ongoing monitoring regularly monitor and carry out in-depth in early 2022, particularly in the area of reviews of their activities to assess how TCFD climate metrics and analysis. We’re We continue to face challenges with Cash Extended engagement services to Start alignment assessment they’re voting and engaging with issuers also rolling out the same process to our a large portion of our portfolio, cover listed corporate holdings; on climate-related issues, as well as how Alternatives fund managers, and we particularly when trying to carbon measured carbon footprint they report their actions, both publicly aspire to have appropriate templates in footprint our Liability Driven and to us. place across the book by 2022. investment (LDI) and Hybrid assets, Indirect Equities Measured carbon footprint; started Transition to low carbon benchmark; as agreed methodologies and alignment assessment; started additional TCFD metrics required However, more can be done, so we’re underlying data for these assets are scenario analysis; 昀椀nalised new climate from managers continuing to drive transparency across still extremely scarce. aware benchmark our portfolio by focusing on each asset Taking action: By actively working class in turn. This year we worked with our Liquids managers, we’ve We continuously search for better Investment Grade (IG) Measured carbon footprint; Additional TCFD metrics required extensively with our Liquids managers achieved new levels of climate- ways to address this. In the meantime, and Emerging Markets started alignment assessment; from managers to develop dedicated reporting related insight. Insight that has we’re applying qualitative measures (EM) credit started scenario analysis templates that will give us insight into already significantly impacted where possible and focusing on Absolute Return Measured carbon footprint; Additional TCFD metrics required essential ESG, climate and stewardship their risk profile. engaging with public policymakers started alignment assessment from managers data across our Liquid portfolios. where we see a bene昀椀t to the market. Alternatives Climate-related questions in due Speci昀椀c asset class reporting diligence and ongoing monitoring; templates on ESG and TCFD metrics; started alignment assessment on start alignment assessment beyond Property Property We’re pleased to report that 100 per cent of our managers of publicly traded assets are now reporting under this new framework, so we have oversight over: ESG policy compliance ESG portfolio pro昀椀le during the quarter, including identifying and managing material ESG risks TCFD climate assessment of the portfolio Stewardship activities during the quarter, including engagement and voting

Strategy and risk management – continued New equity benchmark Engaging with issuers When we reviewed the results of Our RI reports provide detail on the 50% our 昀椀rst carbon audit of our Equities stewardship activities and progress portfolio in 2019/20, it was clear that of our stewardship provider, our fund Our new equity our equity benchmark’s fundamental managers and any direct engagements benchmark targets characteristics were leading to a we have carried out over the year. relatively high weighting in carbon- This includes activities related to a reduction of at intensive companies. climate issues. least 50 per cent We decided to address this by from the FTSE developing a new climate-aware version All-World Index’s of our equity benchmark, in partnership carbon emissions with our index provider FTSE Russell. and reserves We wanted to 昀椀nd a balance where we remain engaged with companies intensity. that are critical to the transition while also identifying companies that we feel are no longer participating or whose industries are in terminal decline. In March 2021, we 昀椀nalised the Custom Collaborating with industry FTSE All-World Climate Minimum • We’ve been a signatory to the Variance Index. We’re spending the 昀椀rst Principles for Responsible Investment few months of the 2021/22 昀椀nancial year (PRI) since 2007 and our Head ensuring a smooth transition to the new of ESG currently sits on the PRI's index with our external fund managers Infrastructure Advisory Committee and service providers. • We’re also an investor member We anticipate that the new index will of the IIGCC result in a carbon reduction of nearly • During the year, we supported two thirds compared with the original the UK ‘Green+ Gilt Proposal’ for a benchmark. This will immediately sovereign bond combining social with feed through into our passive equity environmental impact, developed mandates. However, we also expect this by Impact Investing Institute, Green to help drive a reduction in our footprint Finance Institute and Grantham in the active equity mandates in time. Research Institute. We contributed to discussions around developing robust and measurable metrics for reporting Taking action: Our new on these co-bene昀椀ts. climate-aware equity benchmark • We encourage greater climate will help us to differentiate disclosure through supporting between companies that are initiatives such as the CDP and part of the low carbon transition the TCFD and those whose risks we’re not • We also engage with companies comfortable being exposed to. identi昀椀ed by Climate Action 100+ and the TPI to improve their transparency and management of climate-related issues

Metrics and targets How we’ve reported We don’t mandate to our fund Carbon managers that our portfolios are 16% Absolute carbon Scope 1+2 PPF AUM data invested according to a speci昀椀c carbon emissions 1 emissions or intensity target. However, Our Equities emissions assessed coverage We’ve shared the metrics we can as part of our oversight and monitoring PPF (tCO2e) ($m) (Scope 1+2) currently generate – based on available of our managers, we use the 昀椀ndings portfolio has seen Equities 796,972 6,528 98% data – to assess our climate-related from carbon footprinting to inform and its carbon footprint We measured the total operational risks and opportunities. Alongside steer our dialogue with them. We want 1 each metric, we’ve outlined our to ensure that material risks have been reduce by 16 per cent Scope 1 + Scope 2 carbon Credit 329,106 6,214 86% considerations of the outputs and emissions associated with our identi昀椀ed and considered within their over the year. liquid investments in global equity where we want to improve data access. investment decision-making. (Equities), global investment grade UK Credit 94,378 2,012 60% Although our year end is 31 March, (IG) and EM corporates (Credit), we’ve opted to review our climate Our preferred metric for assessing and the publicly traded UK credit Total 昀椀nanced emissions 1,220,456 14,754 88% exposure metrics at the end of each carbon risk exposure on a day-to-day within our hybrid assets (UK Credit), calendar year, 31 December. This allows basis is the Weighted Average Carbon December 2020 for the greatest coverage of climate data Intensity (WACI), as outlined on page as of 31 December 2020. This at a point in time when, for example, 12. We feel it gives us the greatest accounted for approximately one Certain information ©2020 MSCI ESG Research LLC. Reproduced by permission; the annual corporate CDP responses quarter of our overall assets under no further distribution. coverage in 昀椀xed income where we have management (AUM). In time, we’ll are made available to investors more signi昀椀cant exposure, and allows us look to extend this out to other PPF financed emissions (at 31 December 2020) each autumn. to compare similar types of assets and asset classes, but we’re currently portfolios, regardless of investment size. limited by data availability. 1,400,000 Carbon footprint metrics We decided to expand the coverage of our global credit portfolio to include the We’ve used Enterprise Value Including Cash (EVIC) to calculate 1,200,000 94,378 corporate bonds held within our EM our apportioned ‘ownership’ of We’ve chosen to report a range of debt mandates this year. We expected each investment, as recommended e) 329,106 carbon emissions-based metrics for this would increase our overall credit by the PCAF. The PCAF method 2 1,000,000 our listed global equity and credit carbon footprint over the year because is currently one of the most investment holdings to align with both EM companies often have a higher widely accepted approaches TCFD and Partnership for Carbon carbon footprint, especially in the more 800,000 intensive sectors. for determining an investor’s 796,972 Accounting Financials (PCAF) guidance. 昀椀nanced emissions. We have also been guided by the DWP’s 600,000 recent climate risk consultation around Therefore, our total 昀椀nanced proposed metrics for pension funds. emissions across our Equities, Appendix 2 includes metrics that will Credit and UK Credit holdings was Financed emissions (tCO400,000 also be included in the 2020/21 PPF 1,220,456 tonnes of CO equivalent Annual Report. 2 (tCO2e) for assets representing $14.8 billion. We will monitor this 200,000 昀椀gure annually. In doing so, we’ll need to consider balancing an anticipated increase in our AUM 0 with a preference not to increase Scope 1+2 emissions at 31 December 2020 the 昀椀nanced emissions associated with these assets. Equities Credit UK Credit We are also reviewing Scope 1 3 emissions in some sectors Certain information ©2020 MSCI ESG Research LLC. Reproduced by permission; where they are more material no further distribution. (e.g. Transportation and Oil & Gas), but we feel the data is not robust enough to formally report on currently. 1 Based on the de昀椀nition set by the Greenhouse Gas (GHG) Protocol

Metrics and targets – continued Relative carbon How we measure Global Equities portfolio: PPF Equities carbon metrics intensity carbon intensity carbon intensity metrics Our Equities portfolio is less carbon-intensive than its 450 400 414 • Financed carbon emissions per benchmark across all carbon intensity metrics. Using the 350 We see merit in looking at climate WACI metric to compare carbon performance, it is 19 per 300 294 290 299 million dollars invested metric 250 risks through di昀昀erent lenses, so Measuring the Financed Carbon cent less carbon-intensive than the equity benchmark. 200 230 226 257 243 we’ve used a variety of approaches for Year-on-year, it has reduced by 16 per cent from 2019 to 150 measuring emissions-based carbon Emissions per million dollars 2020. However, we note that the equity benchmark saw a 100 116 122 155 125 intensity of our portfolios. invested helps us understand the reduction of 30 per cent over the same period. 50 e per $million metric carbon emissions being 昀椀nanced 2 0 by the size of our investment d We expect to report lower carbon intensity 昀椀gures next e/$m e/$m e/$m portfolio. year, after the equity benchmark transition is completed. 2 2 e/$m2 2 intensity intensity invested) invested) revenues) revenues) (tCO (tCO (tCO (tCO • Financed carbon emissions per Tonnes CO PPF financed PPF finance PPF weighted average carbon average carbon carbon intensity million dollars revenue metric carbon intensity carbon emissions Measuring the Financed Carbon carbon emissions Benchmark financed Benchmark financed Intensity per million dollars of Benchmark weighted revenue helps us understand the December 2019 December 2020 carbon e昀케ciency of our portfolio, i.e. how e昀케cient the companies Global Credit portfolio: PPF Credit carbon metrics are at generating output per carbon intensity metrics tonne of carbon. As mentioned, we included our EM corporate holdings in 450 400 • Weighted Average Carbon this year’s Credit assessment, whereas we only covered the 350 Intensity (WACI) metric global developed IG credit holdings in 2019. That means 300 318 313 250 250 255 As recommended by the TCFD, these 昀椀gures aren’t truly directly comparable year-on- 200 219 203 we use the WACI footprint to year, and, unsurprisingly, we’ve seen an increase in the 150 193 192 monitor our portfolios’ exposure portfolio’s WACI metric due to the EM companies having 100 91 85 50 65 to carbon-intensive companies. a higher carbon intensity on average. 53 e per $million metric20 d It’s 昀氀exible enough to use across Furthermore, we’re still comparing the Credit portfolio e/$m e/$m e/$m asset classes and gives us against an IG credit benchmark – we recognise that this 2 2 e/$m2 2 intensity intensity invested) greater coverage in 昀椀xed income invested) revenues) revenues) (tCO (tCO (tCO (tCO portfolios. benchmark is likely to have a lower carbon intensity due Tonnes CO PPF financed PPF finance to having less EM exposure. Although we expected this PPF weighted average carbon average carbon carbon intensity carbon intensity outcome, we’ll consider what actions we might wish to take carbon emissions See Appendix 3 for more detail. carbon emissions to address this in the coming year. Benchmark financed Benchmark financed Benchmark weighted December 2019 December 2020 UK Credit portfolio: PPF UK Credit carbon metrics (2020 only) Carbon intensity metrics We’re reporting on these metrics for our internally 200 180 managed public UK Credit portfolio for the 昀椀rst time this 160 175 year, giving us a baseline for reporting our progress next 140 153 year. The availability of carbon data for our holdings is 120 lower than our other reported portfolios (60 per cent) 100 but we feel it’s important to start measuring what we can. 80 60 This portfolio is not managed against a speci昀椀c credit e per $million metric4047 benchmark, so we’ve measured it on an absolute basis. 2 20 0 Tonnes CO e/$m2 e/$m2 intensity invested) (tCO (tCOrevenues) PPF financed PPF financed PPF weighted average carbon carbon intensity Certain information ©2020 MSCI ESG Research LLC. carbon emissions Reproduced by permission; no further distribution.

Metrics and targets – continued Disclosure rates Disclosure of carbon emissions by High carbon-impact In the Equities book, Materials and and data quality market value (%) sectors Energy companies also represent 2.3% 6.9% 100% a signi昀椀cant portion of the overall 22.8% 19.0% emissions. We are mitigating this by 90% 44.0% moving to our new climate-aware Getting good quality, self-reported 80% The TCFD recommendations steer equity index in the coming year. carbon data from corporates continues 17.7% investors towards paying particular to be a challenge, particularly for 70% 74.9% More generally, we see engagement attention to the sectors that have 昀椀xed income issuers that don't also 60% 63.2% a higher contribution to global as the preferred way to manage the issue public equity. Due to listing 50% carbon emissions and consider their need for decarbonisation across the requirements, listed equity markets are 49.1% 1 economy. Therefore, we continue by far the most transparent. 40% exposure to these. Guided by this, to push these sectors to transition we focused on the Utilities, Materials 30% and Energy sectors, using the Global through our engagement activities Three quarters of the carbon data for 20% Industry Classi昀椀cation Standard with equity and credit issuers, our Equities portfolio is reported by the including via Climate Action 100+ companies, based on market value. The 10% (GICS) classi昀椀cation. and other initiatives. remainder is modelled by our ESG data 0% The Utilities sector contributes the provider. Although the global and UK Per cent of portfolio disclosure by sourceEquitiesCreditUK Credit most to carbon emissions across all credit portfolios have lower reported Reported Estimated Not disclosed three portfolios, to a higher degree coverage overall, in terms of materiality, than the portfolio’s market value Taking action: Our new climate- the reporting issuers do account for in these sectors; 昀椀ve per cent, aware equity benchmark aims approximately 90 per cent of the Contribution to total carbon emissions by 39 per cent and 19 per cent of to mitigate risks in being overly associated carbon emissions. source of data the Equities, Credit and UK Credit exposed within the higher We are supportive of disclosure 100% 9.5% 6.5% portfolios respectively. impact sectors. measures that are driving more 25.4% 90% 90.5% 93.5% reporting from corporates, both 80% Contribution to overall portfolio carbon emissions by listed and unlisted. We are pleased 70% 74.6% high-impact sector to see increasing momentum from the regulatory side across many 60% 17.9% jurisdictions for TCFD adoption. Our 50% 24.5% stewardship provider communicates 40% our expectation that companies adopt 30% the full TCFD framework through 10.2% 42.1% engagement and voting. We also ask our 20% Equities 4.0% Credit fund managers to push their portfolio 10% 3.2% companies to report on material climate 0% risks, using frameworks such as the Equities Credit UK Credit 68.3% TCFD, even in private markets. Per cent of portfolio disclosure by sourceReportedEstimated 29.8% Certain information ©2020 MSCI ESG Research LLC. Reproduced by permission; no further distribution. Taking action: We are considering setting a disclosure-based target 45.1% UK for our portfolios. Credit Utilities Energy 54.2% Materials Other 0.7% Certain information ©2020 MSCI 0.0% ESG Research LLC. Reproduced by permission; no further distribution. 1 Energy, Materials and Buildings, Transportation and Agriculture, Food and Forest Products are identi昀椀ed by the TCFD as accounting for the largest proportion of GHG emissions, energy usage and water usage.

Metrics and targets – continued Exposure to fossil fuel The UK Credit portfolio, although not Weight of holdings owning fossil fuel reserves activities measured against a benchmark, does have some exposure to companies 12.0% with fossil fuel reserves. However, all 11.0% 5.3% of the companies with reserves, with The risk of fossil fuel assets becoming the exception of one, have strong 10.0% management quality (MQ) scores for 9.0% stranded is a signi昀椀cant concern in climate-related strategy (as assessed by both an orderly or disorderly transition the TPI). 8.0% 7.9% towards net zero emissions by 2050. 7.0% 3.2% In fact, the most carbon-intensive The ‘weight of holdings’ metric tells us 6.0% 6.1% 5.2% 6.3% assets are likely to become stranded what our exposure is to companies much sooner. This is due to the falling that have reserves on their balance 5.0% 1.8% cost of renewable energy production sheet, but doesn’t give insight into the 4.0% 4.4% and rising carbon prices in regions with magnitude of potential emissions that 3.0% 1.6% 1.7% 1.9% emissions trading schemes or carbon might be released from the burning Per cent weight in portfolio3.0% 3.0% taxes. Thermal coal is unarguably facing of these reserves. Therefore, we have 2.0% 1.5% 1.8% also assessed the potential embedded 1.9% transition risks in the next 昀椀ve to ten emissions and contribution by reserve 1.0% years within the OECD regions. 1.2% 0.8% 1.2% type, as shown in the chart to the right. 0.0% 0.3% As a result, we assessed our portfolios’ Equities Equities benchmark Credit Credit benchmark UK Credit exposure to fossil fuel reserves by Our Equities portfolio has approximately overall percentage, as well as by 40 per cent lower embedded emissions Weight of companies owning any fossil fuel reserves Thermal coal Gas Oil than its benchmark, and our global fuel type. Credit portfolio has approximately 50 Certain information ©2020 MSCI ESG Research LLC. Reproduced by permission; no further distribution. The Equities portfolio has higher per cent lower embedded emissions. exposure than our equity benchmark. Both the global Credit and UK Credit As this is beyond a level we’re portfolios have minimal exposure to Potential emissions from reserves and contribution from reserves type comfortable with, it was a fundamental potential emissions from thermal coal. consideration in the design of our 30,000,000 120% new climate-aware equity index and we expect a signi昀椀cant reduction 26,116,086 25,958,559 to our exposure post-transition 25,000,000 100% to the new index. Taking action: Although the 29.7% 8.4% 39.1% 40.0% 51.9% Equities portfolio already has 10.8% The global Credit portfolio has lower thermal coal embedded 20,000,000 80.8% 80% a low exposure overall – especially emissions than its benchmark, in thermal coal – and when compared we have sought to reduce 15,000,000 15,868,662 60% to its benchmark. this further within the new 16.5% 13,312,590 44.8% We have sought to climate-aware index. 53.8% 53.4% 47.1% signi昀椀cantly reduce 10,000,000 40% our exposure to fossil 5,000,000 20% fuel reserves in our 15.1% new climate-aware 7.5% 1.0% 292,085 Potential embedded emissions in tonnes0 0% equity index. Equities Equities benchmark Credit Credit benchmark UK Credit Potential emissions from fossil fuel reserves Contribution from thermal coal Contribution from gas Contribution from oil Certain information ©2020 MSCI ESG Research LLC. Reproduced by permission; no further distribution.

Metrics and targets – continued How we calculate MSCI VaR Reporting PACTA and Bank of England Company alignment assessments forward-looking TPI and our Equities portfolio TPI MQ distribution in our Climate VaR portfolio analysis, available climate stress tests We’re also starting to monitor the scenario analysis The TPI tool uses publicly disclosed Equities portfolio via MSCI, allow us to select from a range The PACTA transition monitor tool carbon performance trends and target information collected by FTSE Russell We reviewed our Equities portfolio’s of transition risk scenarios and two assesses exposure to climate transition setting of companies through: and validated by the Grantham distribution of MQ scores, and physical risk scenarios. This gives us risk and has been adapted in part for Research Institute at the London the portfolio is mainly exposed to an idea of the transition and physical TCFD scenario analysis. It analyses the • TPI’s Carbon Performance alignment School of Economics. The TPI companies with a higher MQ score risks to which the portfolios could be portfolio’s company holdings and their assessments We use a variety of tools that o昀昀er database covers more than 400 of of 3, 4 and 4*. We 昀氀ag holdings exposed, under di昀昀erent circumstances: capacity plans in line with an economic • Science Based Targets initiative (SBTi) di昀昀erent ways of running forward- the world’s highest emitting listed that receive a MQ score of lower looking analysis on our portfolios. companies across 16 business transition limiting global warming to 2°C tool for 昀椀nancial institutions Some tools are still in their infancy, and than 3 from the TPI for additional • Physical risks (Aggressive scenario) above pre-industrial levels. It covers the • Our own pilot project on portfolio most only cover the listed corporate sectors. These companies represent review, as it means the company The top three physical risks that most climate-relevant sectors: power, alignment space and consider transition risks. approximately 16 per cent of global may not be taking adequate action our Equities, Credit and UK Credit oil & gas, automotive, steel, aviation, However, even though we can’t get market value and a much larger share on its climate-related risks. Our portfolios are all estimated to be most cement and coal. We have found there are still substantial comprehensive assessments across of global greenhouse gas emissions. stewardship provider also uses the exposed to are coastal 昀氀ooding, limitations to using open-source tools TPI assessments when forming voting extreme heat and tropical cyclones. While initially mandatory for insurance for portfolio-level analysis. One example entire portfolios, the 昀椀ndings can still TPI ranks companies by two recommendations for our companies. is the delivery of these datasets is help inform our conversations with our measures, based on their public • Risks under a 1.5°C scenario companies, the Bank of England climate fund managers. Under this scenario, the Equities and stress test tool also allows other usually a simple spreadsheet with only disclosures. Firstly, it ranks how well one company identi昀椀er provided, so company management deals with Credit portfolios have roughly equal 昀椀nancial institutions – including asset Scenario analysis tools climate transition VaR and physical owners – to assess the vulnerabilities mapping the dataset to our portfolios climate change risks from 0–4* (MQ). Taking action: This informs of their portfolios to adverse climate can be extremely onerous. Another we’re using A score of 0 means no recognition our engagement and VaR. The UK Credit portfolio, however, change and energy transition scenarios. is the limited scope that they often or action, and 4/4* means climate voting strategy. It will also has a di昀昀erent exposure; the physical provide, either in focusing on just one change has been deeply integrated be a consideration in the VaR is nearly three times greater than We have started using the PACTA asset class, or on a small subset of into business operations. It also looks construction of our new the transition VaR. tool, but acknowledge that it only companies/industries. We introduce here some of the analysis tools we are using in our monitoring to at how e昀昀ective they are at achieving climate-aware index for the • Risks under a 2°C scenario covers a relatively small 10–12 per help us understand how our portfolios carbon reduction in line with the highest risk sectors. The UK Credit transition VaR almost cent of the portfolios across the might be impacted in the future, as a Paris Agreement, compared to any doubles when moving from a 1.5°C subset of sectors. However, it provides result of climate change. emissions reduction targets they’ve to a 2°C scenario. There are smaller helpful granularity on the current Taking action: We will review set (Carbon Performance). increases for Equities and Credit. This and projected technology mix of the corporate carbon performance is largely driven at the Scope 1+2 level, underlying companies for the next 昀椀ve and targets to challenge rather than Scope 3. years and compares this with what our managers on their own mix is required to align with certain assessments and engagements, TPI MQ distribution in our Equities portfolio • Aggregate warming potential scenarios. particularly in higher-risk sectors. temperature gauge 140 The Climate VaR reports also provide 120 an aggregate warming potential Setting targets temperature gauge for the portfolios. 100 This year’s assessments indicated a lower temperature gauge for both the 80 Equities and Credit portfolios versus We’re currently reviewing what targets their benchmarks. we feel are most appropriate to set for 60 our portfolios. Number of companies40 Taking action: We are using these We will most likely start o昀昀 with 20 findings to inform our discussions disclosure and coverage-related targets 0 with our managers and to initially, as we’re keen to drive better MQ=0 MQ=1 MQ=2 MQ=3 MQ=4/4* understand their strategy on how corporate reporting as a starting point best to manage these risks. for more accurate risk management. TPI’s MQ score Once we have outputs from our portfolio alignment project, we will also consider how setting alignment-based targets might be appropriate.

Our aspirations Climate change will remain a priority for us. We’re looking forward to seeing We’re looking the results of our portfolio alignment forward to seeing project across our entire portfolio the results of our which will empower us to drive a deeper portfolio alignment understanding of the risks we face – and project across our take action on them. As we work our way entire portfolio. through the results and outputs from our analyses, we’ll continue to evolve our strategy and action plans, top-down and Barry Kenneth bottom-up. Chief Investment O昀케cer We’ll be transitioning to a new equity benchmark in the 昀椀rst half of 2021/22. We expect this to drive a signi昀椀cant reduction in the carbon footprint Getting in touch metrics for our Equities portfolio, particularly in our passive mandates. We have worked hard to improve our Claire Curtin Head of ESG [email protected] access to data. Given our signi昀椀cant exposure to 昀椀xed income, we hope to see Iliana Lazarova an expansion of coverage across the asset Senior ESG Analyst classes in tools addressing the Credit and [email protected] Sovereign markets over the next year to help inform our strategy further. We will also continue to push our fund managers in all of our asset classes to step up their Visit our website to read our reporting to us, and encourage them to be latest news and reports. setting standards in best-in-class reporting for their markets. Follow us on Twitter @ppf

Appendices Appendix 1: PPF climate change policy Appendix 2: Disclosure metrics from the Annual Report and Accounts Beliefs Manager expectations Disclosure metrics as recommended by the TCFD Equities Equity As a long-term investor, we have a duty We expect our external fund managers 1 2 to consider all 昀椀nancially material risk to understand and integrate material Metric Scopes PPF Equities Coverage benchmark Coverage factors in our investment decisions, climate-related risks into their analysis Metrics based on investor allocation (using EVIC3) for $6.5bn Equity portfolio: including climate-related. We believe and investment process. This includes Total Financed Carbon Emissions (tCO2e) Scope 1+2 796,972 97.6% 818,760 97.3% climate change can materially impact undertaking carbon footprinting and Financed Carbon Emissions businesses, markets and economies scenario analysis, assessing asset (tCO2e/$m invested) Scope 1+2 122.1 97.6% 125.4 97.4% globally in a number of ways, from exposure to physical risks, and engaging Financed Carbon Intensity a societal perspective as well as with issuers, where relevant for their (tCO e/$m revenues) Scope 1+2 225.5 97.6% 256.9 97.3% environmental. asset class. 2 Metrics based on weights (WACI) for Equity portfolio: We’ve developed a speci昀椀c climate In monitoring the exposure and WACI (tCO e/$m revenues) Scope 1+2 242.7 97.6% 298.7 97.4% change policy, as we see climate change performance of our external fund 2 as a systemic and non-diversi昀椀able managers, we’ll review how they’re concern, which has the potential managing climate-related risks and 1 Based on the de昀椀nition set by the Greenhouse Gas (GHG) Protocol. The GHG Protocol has set the global standard for GHG reporting, notably the three scopes of reporting information: Scope 1: Direct GHG emissions from operations; Scope 2: Electricity indirect GHG emissions (the to signi昀椀cantly a昀昀ect the value of opportunities, including voting and companies’ indirect emissions from electricity, heating, or steam consumption); Scope 3: Other indirect GHG emissions. More detail is available at: our investments across the short, engaging with issuers on climate-related https://www.ghgprotocol.org/sites/default/昀椀les/ghgp/standards_supporting/Diagram%20of%20scopes%20and%20emissions%20across%20 medium and long-term, throughout issues, and how they’re reporting to us the%20value%20chain.pdf the global economy. We also believe on their actions. 2 FTSE All World Minimum Variance Index that opportunities can exist and be 3 Enterprise value including cash = market capitalisation at 昀椀scal year-end date + preferred stock + minority interest + total debt exploited for companies and assets Collaboration Credit well-positioned for the transition to a low-carbon economy. Credit 1 Metric Scopes PPF Credit Coverage benchmark Coverage Assessment We also collaborate with the wider investment community on climate Metrics based on investor allocation (using EVIC) for $6.2bn Credit portfolio: change issues, as a signatory to the PRI Total Financed Carbon Emissions (tCO2e) Scope 1+2 329,106 86.2% 525,417 68.7% and as a member of the Institutional Financed Carbon Emissions We recognise the complexity and IIGCC. We seek to encourage greater (tCO2e/$m invested) Scope 1+2 53.0 87.6% 84.6 71.8% barriers to identifying and assessing climate disclosure through supporting Financed Carbon Intensity the forward-looking 昀椀nancial initiatives such as the CDP and the (tCO e/$m revenues) Scope 1+2 192.4 86.2% 202.8 68.7% materiality of climate-related impacts TCFD, and through engaging with 2 on our investments. However, we companies identi昀椀ed by Climate Action Metrics based on weights (WACI) for Credit portfolio: seek to assess the exposure of our 100+, so that exposure to climate WACI (tCO2e/$m revenues) Scope 1+2 317.9 93.1% 255.3 84.3% investments to climate-related risks risks (and opportunities) can be better and opportunities through a range understood. 1 Bloomberg Barclays Global Credit Index of metrics and analysis, as the tools available to measure these evolve. Reporting and engagement Source: Certain information ©2020 MSCI ESG Research LLC. Reproduced by permission; no further distribution (PPF holdings as at 31 December 2020). Consideration will be given to the Metric de昀椀nitions: potential impacts on asset prices and • Total Financed Carbon Emissions: Measures the Scope 1 + Scope 2 tonnes of CO equivalent emissions for which an investor is responsible by their total overall 昀椀nancing. Emissions 2 return expectations across both short We’ll communicate and engage on are apportioned across all outstanding shares and bonds (% EVIC). • Financed Carbon Emissions: Measures the Scope 1 + Scope 2 tonnes of CO equivalent emissions, for which an investor is responsible, per USD million invested, by their total overall and longer-term time horizons, and how the actions and progress that have 2 this could inform our decisions around been taken around our climate change 昀椀nancing. Emissions are apportioned across all outstanding shares and bonds (% EVIC). • Financed Carbon Intensity: Measures the carbon e昀케ciency of a portfolio, de昀椀ned as the ratio of Scope 1 + Scope 2 tonnes of CO equivalent emissions for which an investor is strategic asset allocation and portfolio 2 strategy to relevant bene昀椀ciaries and construction. responsible to the revenues for which an investor has a claim by their total overall 昀椀nancing. Emissions and sales are apportioned across all outstanding shares and bonds (% EVIC). stakeholders, reporting in line with TCFD • WACI: Measures a portfolio’s exposure to carbon intensive companies, de昀椀ned as the portfolio weighted average of companies’ carbon intensity (Scope 1 + Scope 2 tonnes of CO 2 guidance for asset owners. equivalent emissions per million USD of revenues). We seek to oversee all new and existing investment arrangements in a way that takes account of climate transition and adaptation risks, as well as resilience, opportunities and inclusivity, in line with 2°C or lower climate-related scenarios.

Appendices – continued Appendix 3: Carbon metric equations Total Financed Carbon Emissions in tonnes CO2e: i current value of investment in entity X entity’s GHG emissions ∑ n ( Entity’s Enterprise Value including cash ) Financed Carbon Emissions per million dollars invested metric (may be shown in other currencies too): i current value of investment in entity X entity’s GHG emissions ∑ n ( Entity’s Enterprise Value including cash ) current portfolio value ($m) Financed Carbon Intensity per million dollars revenue metric (may be shown in other currencies too): i current value of investment in entity X entity’s GHG emissions ∑ n ( Entity’s Enterprise Value including cash ) i current value of investment in entity X entity’s revenue ∑ n ( Entity’s Enterprise Value including cash ) Weighted average carbon intensity metric (where normalisation factor is entity’s revenues, but other normalisation factors can be used): i current value of investment in entity entity’s GHG emissions X ∑( current portfolio value normalisation factor ) n

This report contains certain information (the “Information”) sourced from MSCI ESG Research LLC, or its a昀케liates or information providers (the “ESG Parties”). The Information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any 昀椀nancial instruments or products or indices. Although they obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/ or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and 昀椀tness for a particular purpose. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost pro昀椀ts) even if noti昀椀ed of the possibility of such damages. The Pension Protection Fund Renaissance 12 Dingwall Road Croydon CR0 2NA www.ppf.co.uk www.twitter.com/ppf