10 Pension Protection Fund Climate Change Report 2021/22 Strategy and risk management We continue to look to improve how we identify, quantify and Assessing Liquids – After the success of getting our Liquids managers to Next steps manage climate-related risks and opportunities that could a昀昀ect implement our quarterly ESG reporting templates last year, we’ve since The enhanced additional TCFD our investments, our business plans and strategy. Increasingly we concentrated on expanding the range metrics we now request in our are also looking to take account of our own operations and reduce of TCFD-related metrics on which quarterly ESG reporting templates they report. These now include: will become mandatory in time. the impact of our day-to-day activities on the environment. • additional carbon footprints beyond However, we acknowledge that just Weighted Average Carbon data/analysis doesn’t yet exist for Intensity (WACI) all of the data we have requested How we consider the impact from managers, particularly • a breakdown of the largest in areas including emerging Certain risks (and opportunities) can have of climate on our strategy contributors to carbon intensity market debt and strategies using di昀昀erent likelihoods or magnitude of impact, and resilience (by sector and individual holding) derivatives. Therefore, a lot of data depending on the asset class. • aggregated exposure to fossil fuel is currently provided on a ‘best reserves e昀昀orts’ basis by our managers. We Some examples of the risks and To assess climate-related impacts on our investment continue to support our managers opportunities we’ve identi昀椀ed include: strategy and our planning, we use a wide range of • percentage of holdings disclosing in developing their processes to metrics and techniques. We constantly look to use the emissions and percentage providing provide more depth and accuracy most advanced and relevant analytical tools available TCFD-aligned reporting to these metrics as it becomes • Transition – Risks that may impact to provide the most accurate and helpful analysis. • scenario analysis across at least feasible to do so. company earnings in the shorter term, This year, we’ve moved to considering the impact of a two (ideally three) scenarios, and e.g. policy risks arising from carbon pricing more aggressive 1.5°C climate policy on our portfolios • an assessment of the portfolio’s or taxes. and strategy, mainly by starting to consider Net Zero alignment to the Paris Agreement scenarios within our scenario analysis (namely within our and the percentage of companies • Technology – Risks and opportunities Paris Portfolio Alignment Project – see page 12, and MSCI with targets. as companies develop, or don't adopt, Climate VaR – see page 23). We are also thinking about the We have a minimum level of superior technology to build industry- implications of a 1.5°C warming target more speci昀椀cally in mandatory climate reporting for all based solutions. our pre-investment due diligence: for example, what does of our Liquids managers. Acceptance it mean for housing associations in the UK? of these minimum reporting • Physical – Risks in the medium to long term Advancing our external manager reporting to determine requirements feeds directly into that may impact assets, e.g. infrastructure material risks – We continue to push our fund managers pass/fail funding decisions. and property in certain locations. across all asset classes to step up their regular reporting Assessing Alternatives – For to us and encourage them to set best-in-class reporting alternative asset classes such as • Opportunities – There are opportunities standards for their markets. Over the year, we have made real estate and private equity, there within some asset classes, e.g. sustainable steady progress to improve the quality of both ESG and is generally far less data available. forestry assets that o昀昀er a viable nature- climate reporting from our managers, which has led to However, there is increasing attention based solution to climate change mitigation. much more fruitful conversations with our managers about on private markets and real asset speci昀椀c risks and potential impacts on investment theses. classes and their importance in the transition to Net Zero. We now require our Alternatives managers to report some basic climate data for their funds and demonstrate their grasp on strategy and risk management of climate risks for portfolio companies.