2021/22 | Climate Change Report

Climate Change Report 2021/22

01 Pension Protection Fund Climate Change Report 2021/22 About the PPF: Protecting people’s How we are funded How we are invested When an employer becomes insolvent and its pension We hold £39 billion in our investment portfolio (31 March scheme cannot a昀昀ord to pay the pensions promised, 2022). This amount is managed in a broadly 50/50 split by futures we compensate scheme members for the pensions internal and external investment teams. We invest across they have lost. We raise the money we need to pay PPF both public and private markets, seeking to capture both bene昀椀ts and the cost of running the PPF in four ways: capital growth and reliable income generation to meet pension commitments. Our purpose is to protect the future of millions Split of funding sources Split of asset allocation of people throughout the UK who belong to Assets from pension Equity 11.2% 42.1% schemes transferred de昀椀ned bene昀椀t (DB) pension schemes. to us Global credit Should a scheme fail, we’re ready to help. 22.7% The return we make EMD on our investments Absolute return The levy we charge Cash We do this by charging a levy, investing on eligible pension schemes Alt credit sustainably and paying our members. Recovered assets Private equity 24.0% we secure from Infrastructure insolvent employers Our work has a real impact on people’s lives. Property Timberland & Farmland So whatever we do, we strive to do it well, Hybrid assets with integrity and members’ futures in mind. Gilts The PPF in numbers as at 31 March 2022 9.7 million 5,000+ 295,000 £39 billion The PPF portfolio is currently managed members of schemes DB pension schemes PPF members of assets under to achieve two long-term objectives: we protect protected currently receiving management • Grow assets at cash + 1.5 per cent annualised over the long term bene昀椀ts • Allocate a risk budget to assets in our investment universe as e昀케ciently as possible, while ensuring that the interest rate and in昀氀ation risks within our liabilities are fully hedged through our Liability Driven Investment (LDI) strategy.

02 Pension Protection Fund Climate Change Report 2021/22 Contents 03 Introduction from our Chair 04 Key achievements 05 O verview: Putting climate at the heart of our strategy Our progress at a glance 2021/22 06 07 Governance and accountability 10 Strategy and risk management 17 Metrics and targets 28 Our aspirations for the coming year 29 Appendices

03 Pension Protection Fund Climate Change Report 2021/22 Introduction from our Chair The COP26 Climate Summit The PPF is committed to shaping best practice Many organisations are making statements about in this regard. One of the four priorities of our new their ambitions to support a world of ‘Net Zero’ held in Glasgow last November Strategic Plan for the next three years is ‘Making carbon emissions. We share this vision. But to ensure a di昀昀erence’. As part of this, we are developing our actions are e昀昀ective, practical and sustained, we intensi昀椀ed the impetus for a holistic sustainability strategy, and continuing are taking a thorough, data-led approach to change. to set ourselves high standards on climate co-ordinated global action change, responsible investment and diversity & So we’re looking at the detail, measuring our inclusion (D&I). performance, and driving action based on facts and on climate change. It also analysis. Through this kind of work and innovation We aim to set the standard in our approach to we will make a positive di昀昀erence, particularly in increased expectations on major responsible investment by constantly advancing the areas directly within our control. I’m proud analysis of our climate-related risks and setting clear of the work we’re doing in this area. We have a institutional investors – such expectations and actions to respond to them. We genuine opportunity to help shape the debate continue to advance our stewardship practices to and raise standards. as pension schemes and their reduce the risks to which we are exposed. And we engage constantly with our external fund managers trustees – to assess the role to encourage ever-greater levels of transparency and disclosure. their assets are playing in either We also recognise that we need to be prepared to hold ourselves to the same high standards as we do contributing to, or mitigating, others. As well as rigorously assessing the climate risks of our investment portfolio, we have therefore Kate Jones the threat of global warming. started to look at the environmental impact of our Chair own operations.

04 Pension Protection Fund Climate Change Report 2021/22 Key achievements Addressing climate change through best practice is a priority for the PPF. We continue to evolve our strategy and actions to monitor, manage and ultimately reduce the carbon emissions connected to our investments and our own operations. In this way, we strive to reduce the risk that climate change presents to our members’ future 昀椀nancial wellbeing – and steer all our investments to support a Net Zero world. Governance and Committed to developing a holistic Accepted by the Financial Reporting Introduced new company voting Reported climate-related risks through Created clear commitment accountability sustainability strategy as part of the Council (FRC) as a signatory to the UK guidelines for climate change monthly dashboards to our CIO and to and oversight of action to PPF’s new Strategic Plan Stewardship Code 2020 through quarterly dashboards to our reduce climate-related risks Investment Committee on behalf of our members See page 09 See page 09 See page 07 Strategy and risk Updated our climate policy and tools to re昀氀ect Conducted a Net Zero alignment project across our Transitioned to our new equity benchmark to drive Acted to reduce exposure management scenarios for global action to limit warming to complete portfolio to assess our alignment with a signi昀椀cant reduction in the carbon exposure of our to climate risks across our 1.5°C rather than 2°C the Paris Agreement and identify highest priority equity mandates, especially passive ones portfolios to safeguard our engagement targets members’ future 昀椀nancial wellbeing See page 10 See page 12 See page 16 Engagement and Helped to develop a cross-body Actively participated in a working Participated in CA100+, the biggest- Encouraged to see a number of our Continued to support and collaboration industry-standard TCFD template for group for the newly launched IIGCC ever investor engagement initiative external fund managers joining the encourage industry best managers to report carbon emissions Net Zero Stewardship Toolkit to which we are a signatory, which Net Zero Asset Managers initiative – practice to protect the long- to clients saw over 50 per cent of targeted 25 per cent have committed so far term interests of our members companies committing to Net Zero and nearly 75 per cent aligning their See page 11 See page 15 disclosures with TCFD during the year Disclosure Began reporting against the Greening Expanded the range of TCFD- Started requiring basic climate data Shortlisted for the Pensions for Ensured we share as deep Government Commitments on our related metrics on which our from our Alternatives managers and Purpose Paris Aligned Awards for the an insight as possible of the 1 operational environmental impact Liquids managers report to us introduced key ESG risk analysis Best Climate Governance and Strategy climate exposures we face Statement in November 2021 to provide transparency for See page 30 and our 2021/22 Annual See page 10 See page 10 our stakeholders Report & Accounts 1 ‘Liquids’ refers to Global Credit, Public Equity, Absolute Return, Emerging Market Debt and Strategic Cash. All of these, apart from Strategic Cash, are managed externally.

05 Pension Protection Fund Climate Change Report 2021/22 Overview: Putting climate at the heart of our strategy This year we continued our integration e昀昀orts to improve our access to underlying climate data via our portfolio management systems. For listed markets, the emissions data available through our systems has increased from 30 per cent to 55 per cent of the Fund’s net asset value (NAV) over the year. A holistic approach to sustainability The impact the PPF has on the lives of its current and future members Data is still largely unavailable for private markets, Of course, currently, there is no standardised is clear, which is why we have further strengthened our commitment to however. Understanding the climate risk pro昀椀le process for doing this. So our attempt may be making a di昀昀erence in everything we do. of a diverse portfolio such as ours, with exposure a good example of how it might be done for a Over the coming year we will develop a holistic sustainability strategy, to a number of unlisted investments, therefore complex portfolio made up of public and private building on our established approach to responsible investment and remains challenging. To address this, we are investments and where diversi昀椀cation is essential the signi昀椀cant progress already achieved in our strategic response to actively supporting a broader environmental, to managing investment risk. climate change. As always, we are focused on balancing the 昀椀nancial social and governance (ESG) data outreach commitments to our members with the need for urgent, large-scale project, led by alternative investment technology Only by doing this groundwork can we 昀椀gure action to limit global warming. platform eFront, to engage with private markets out how we, as an investor, can get to Net managers to improve the availability of data at a Zero e昀케ciently and at pace – and without As a recent signatory to the FRC’s UK Stewardship Code 2020, our portfolio company and fund level. any greenwashing. commitment is clear. Driving action through thorough data-driven analysis and solutions, transparently managing risk, setting new standards As we detail in this report, we are also working in responsible investing (RI) and sharing our learnings to help others, are all with Dutch consultancy Ortec Finance to assess Barry Kenneth core to our beliefs and values. climate alignment across every asset class in Chief Investment O昀케cer our portfolio, with a particular emphasis on We will continue pushing ourselves to further the sustainability of our private markets. investments, as well as managing our own operational environmental impact, and that of our suppliers. The aim of this extensive and ambitious project is to measure forward-looking alignment with climate targets. In particular, we have looked Oliver Morley to assign a temperature score to every asset Chief Executive we invest in so we can see how the portfolio aligns with the Paris Agreement to limit global warming. In this way, we can establish a baseline and therefore better manage the climate risk exposure of our whole portfolio.

06 Pension Protection Fund Climate Change Report 2021/22 Our progress at a glance Achieving more Focusing on investing Reducing our Cutting our comprehensive reporting with managers committed investment portfolio’s climate risks to climate action carbon footprint 55% 25% 50% 12% 2 of our Fund’s net asset value now of our external managers now reduction in the absolute carbon emissions reduction in our Equities portfolio Climate 3 4 covered by carbon emissions data signatories to the Net Zero Asset and 37% in the carbon intensity of our Value-at-Risk (CVaR) , led by our Climate via our portfolio systems Managers Initiative Equities portfolio over the year Minimum Variance Equity benchmark 2021: 30% 81% 91% 25% 32% of carbon data for our Equities portfolio of our externally-managed assets now reduction in the exposure to thermal of our Equities portfolio invested reported by companies themselves managed by signatories to the PRI coal reserves of our Equities portfolio – in companies that have committed to 2021: 75% 2021: 84% down to

07 Pension Protection Fund Climate Change Report 2021/22 Governance andaccountability Strong governance, with clear Our governance-related activities during the year oversight, responsibility and Function Roles & responsibilities Climate-related activity in 2021/22 accountability, is key to delivering on our climate strategy as well as PPF Board Highest governing body with oversight for Approved our new voting guidelines our broader investment goals. 1 responsible investing (RI) and stewardship activities (including climate-related) Discussed in detail the RI activities and progress taking place throughout the year, This year, we have supported our including outcomes from the transition to a new lower-carbon Equity benchmark and our Paris Portfolio Alignment Project robust RI governance framework with actions to put climate Undertook extensive training to expand the Board’s knowledge and awareness of commitments at the heart of our climate change risks and how these can be managed and monitored business strategy and continued More training planned in 2022 around our Sustainability strategy to be an active steward of the companies we invest in. Investment Responsible for developing and maintaining the Approved the update to our Climate Change Policy and our new voting guidelines and 2 Committee PPF’s RI and stewardship principles and policies reviewed our Stewardship Policy (including climate-related) Our RI and climate-related activities and progress were reported on and discussed at all four IC meetings, providing the Committee with regular oversight on implementation The content within the quarterly IC reporting is still evolving as ESG data and tools improve Investment Team Led by the CIO, responsible for ensuring Climate-related risks in the portfolio reported to our CIO and Head of Investment Strategy 3 adherence to the RI framework, stewardship through monthly dashboards principles and associated policies across all asset classes whether internally or externally managed ESG and climate assessments continued to be formal components of all investment due diligence and manager monitoring processes A number of teach-ins held with portfolio managers, including dedicated workshops for each desk on our Paris Portfolio Alignment Project In-house portfolio managers given access to more ESG and climate-related resources from external providers through our investment risk systems PPF shortlisted in November 2021 for the Pensions for Purpose Paris Aligned Award for the Best Climate Governance and Strategy Statement

08 Pension Protection Fund Climate Change Report 2021/22 GOVERNANCE AND ACCOUNTABILITY CONTINUED Our governance-related activities during the year continued Function Roles & responsibilities Climate-related activity in 2021/22 ESG Team Part of the Investment Team, helping to Developed our new voting guidelines – see Appendix F 4 oversee implementation of the RI framework, monitor investments for ESG risks and Throughout the year, the ESG Team provided updates in the daily Investment Team opportunities, engage with portfolio managers, meetings on ESG issues and trends external managers and our stewardship services provider The ESG Team was expanded with the addition of an ESG Data Analyst to help streamline and improve e昀케ciencies within our ESG data management Our Head of ESG was one of a select few to participate in the UK’s CFA Institute pilot of its new Certi昀椀cate in Climate and Investing quali昀椀cation and was awarded the certi昀椀cate in March 2022 Asset Managers Follows the PPF’s RI framework and stewardship Asset Managers 5 and Stewardship policy, undertakes ESG integration and issuer Having rolled out our new quarterly ESG reporting templates for Liquids managers last year, Services Provider* engagement then reports transparently we evolved the templates this year to expand on the range of TCFD metrics requested and accordingly * EOS at Federated Hermes (EOS) To improve disclosure within Alternatives, we encouraged a number of private markets managers to join the ESG Outreach pilot project initiated by eFront Stewardship Services Provider* We further consolidated our voting processes, bringing more under the remit of our agreement with EOS, giving us better oversight of our voting decisions, especially in terms of consistency around climate-related ballots For pooled funds outside of this agreement, we have a split voting set-up that allows us to override on signi昀椀cant votes and used this during the year

09 Pension Protection Fund Climate Change Report 2021/22 GOVERNANCE AND ACCOUNTABILITY CONTINUED Putting sustainability at the Strengthening our Our RI framework puts our core beliefs into practice: heart of our business strategy stewardship commitment The PPF is committed to driving best practice in We view stewardship as one of the most powerful ways Responsible Investment Framework sustainability as an organisation. This year we launched a we can drive companies to transform their climate impact, new Strategic Plan for 2022–25. Re昀氀ecting our strategic generating real world decarbonisation. In March 2022, we Strategic priority on ‘making a di昀昀erence’, this includes commitments were accepted by the Financial Reporting Council as a Governance & direction Risk Metrics & to develop a holistic sustainability strategy, to set the signatory to the UK Stewardship Code 2020, recognising accountability & policy management transparency standard in our approach to responsible investment and to our e昀昀orts in responsible investment and the strength of reduce our own environmental footprint as an organisation. our new Stewardship Policy. To support our holistic sustainability strategy, we are Escalating our engagement through climate-related voting Priorities forming a Senior Leaders’ Steering Group for interested is also a critical element of our stewardship activities. We non-executive and executive committee members to drafted new voting guidelines during the year to inform our provide input and direction as work progresses. We are voting decisions in the 2022 AGM season. The guidelines also creating internal working groups to address speci昀椀c summarise situations where the PPF will consider voting Climate Change Stewardship Reporting development and implementation initiatives. against management on issues relating to climate change, modern slavery and D&I – see Appendix F for guidelines Updating our climate policy related to climate change. We have selected these topics to re昀氀ect our own focus areas as an organisation. Climate & sustainability Next steps We also consolidated our voting processes across our policies & strategies di昀昀erent equity mandates further to provide greater oversight and consistency – see the ‘Activities by Climate stewardship By 2023 we will establish a baseline of the governance function’ panel above for more detail. PPF’s own environmental impact, and propose Climate risk a sustainability strategy and targets to reduce Being open about what we can do assessments & our impacts over the period to 2025, re昀氀ecting We are pragmatic and transparent about doing what we sustainability best practice standards. can around governance and oversight of climate change reporting in relation to our investments. We recognise that some elements may currently be too costly or too di昀케cult to Climate implement in their entirety. But we continue to monitor the opportunities Since the release of the IPCC special report in late 2018 landscape and work with fund managers, regulators and describing the additional negative impacts caused by 2°C other industry actors to progress best practice, particularly warming compared to 1.5°C warming, global focus has on metrics and reporting initiatives. Where assumptions shifted overwhelmingly to e昀昀orts to limit warming to 1.5°C. have been made, or limitations faced in our assessments, We are now starting to see this re昀氀ected in available climate we are open about this. scenarios, including the International Energy Agency (IEA)’s newer 1.5°C scenario released last year. Accordingly, we have aligned our climate policy with this greater ambition, referencing climate-related scenarios seeking to limit global warming to 1.5°C rather than 2°C (see Appendix B for our updated policy).

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.

11 Pension Protection Fund Climate Change Report 2021/22 STRATEGY AND RISK MANAGEMENT CONTINUED Increasing our internal access to portfolio data Standardising reporting frameworks Considering our operational We regularly review the climate-related services of our We see real value in pushing the We have also joined eFront’s ESG emissions main ESG data provider, MSCI, which is rapidly expanding its Next steps industry to agree on more common Outreach pilot project, which will Most of our material exposure to breadth and depth of analysis, especially within its scenario climate reporting frameworks and work with private equity and credit climate-related risks exists in the analysis and climate value-at-risk (CVaR) measurements. We strongly support tools such as the expansion templates, and being able to share managers to collect relevant ESG downstream ‘昀椀nanced emissions’ Much of this expansion feeds directly into our portfolio of the Transition Pathway Initiative (TPI) into our experience and thoughts on metrics on their underlying portfolio in our investment value chain. and risk management system, Aladdin, so we can now run more credit issuers, and the new ASCOR project this. We played an active role in a companies to feed into investor As a result, we focus our strategy comprehensive TCFD assessments for our listed Equity and by the Principles for Responsible Investment working group led by the Pensions and reporting – an important step in and risk management primarily Credit portfolios in the moment. We have also acquired (PRI) to develop a robust carbon and climate-risk Lifetime Savings Association (PLSA), addressing the lack of ESG data and on these 昀椀nanced emissions, access to a new sustainability module in our private markets assessment framework for sovereigns. As this is the Investment Association (IA) and reporting from private companies. The as recommended by the investment software, eFront, which allows us to conduct work in progress, however, we have started to assess Association of British Insurers (ABI) solution will be available to over 2,500 Greenhouse Gas Protocol Scope key ESG risk analysis for our Alternatives funds. More our sovereign exposure using newly proposed tasked with developing a standard private markets managers, reaching Calculation Guidance. progress is still needed, however, in the coverage of private approaches, starting with our UK Gilts portfolio, TCFD template for reporting carbon over 70,000 private companies. markets and real assets, especially on carbon emissions and which we detail later in this report. emissions. The template was recently However, in support of the transition/physical risks. 昀椀nalised and we plan to roll it out to Government’s commitment managers shortly. to reduce its impact on the We have broader ESG data and scores available through environment we’re also our portfolio management systems for 70 per cent of the reporting against the Greening Fund’s net asset value (NAV), accounting for almost all of Government Commitments our listed holdings. Within these systems, the access to (GGC). This includes reporting more speci昀椀c carbon emissions data – whilst lower than on the environmental impact the broader ESG scores – has increased over the past year of our operations out of our 5 from 30 per cent to around 55 per cent of NAV . two shared-lease buildings in The di昀케culty in assigning carbon emissions and Croydon and London, both understanding our exposure for our sovereign debt holdings of which use energy from continues to limit this coverage. Over the next year we renewable sources and have hope to see an expansion in tools addressing sovereign zero Scope 1 greenhouse gas markets to help inform our strategy further. emissions from combustion. We will evolve this as part of our plans to develop an organisation-wide, holistic sustainability strategy. We can now run comprehensive TCFD assessments for our listed Equity and Credit portfolios in the moment. 5 The percentage of carbon emissions data is lower than broader ESG data, due to a more limited amount of datapoints for sovereigns, supranationals and agencies.

12 Pension Protection Fund Climate Change Report 2021/22 STRATEGY AND RISK MANAGEMENT CONTINUED CASE STUDY Assessing our portfolio alignment with the Paris Agreement There has been a lot of focus recently on how investment portfolios can align to Net Zero commitments, with varying opinions on what it should entail. Wanting to be better informed about our own fund’s position, we began an innovative project in early 2021 to carry out a practical, bottom-up assessment of our portfolio and the implied temperature rise our investments indicate relative to Paris targets. The challenge To address this, we adopted an alternative approach that Implied Temperature Rise (ITR) baseline In 2019, we became involved with the IIGCC’s Paris considered how companies are operating today and then score of our Fund Next steps Aligned Investment Initiative (PAII) to support investors estimated the amount of global warming if the entire world to align their portfolios to the goals of the 2015 Paris operated at the same emissions intensity as the entity in Firstly, we acknowledge the data limitations with Agreement. The PAII developed the Net Zero Investment question. This was then compared with a target emissions these calculations and we’ve had to make some Framework (NZIF), which provided a useful starting reduction pathway for each company’s sector. We also assumptions during the project. However, we do point for us to assess the alignment of our own portfolio estimated sector-speci昀椀c baseline scores for companies now have a much better understanding of the with the Paris target to limit global warming to no more lacking emissions data, which was crucial in allowing us to Market benchmark >3.4ºC most material contributors to climate change in than 1.5°C. proxy our private markets holdings on a more granular basis our portfolio and can therefore make much more in the second phase of the project. PPF 2020 Baseline 2.5ºC informed decisions about what we need to do But the NZIF covered less than 25 per cent of our going forward. portfolio. This was primarily because our signi昀椀cant Interpreting the results Paris Agreement Target 1.5–2ºC allocations in liability hedging instruments and private The overall weighted ITR score for the Fund’s December There are few assets in the broad investment universe market assets were out of the NZIF’s current scope. 6 that can already be categorised as “aligned” to Net 2020 baseline was assessed as 2.5°C, covering all desks . We therefore appointed an external consultant, Ortec For context, this is below the global market estimate of Zero. Just under 20 per cent and 4 per cent in the Finance, to help us design an independent, objective 3–3.5°C warming and at the bottom of the global current PPF Equities and Credit portfolios were identi昀椀ed measure that could baseline our entire portfolio in a country policies ITR projection of 2.5–2.9°C by 2100, both respectively through Ortec Finance’s analysis of these way that aligns with the PAII’s goals. 7 portfolios8 assessed by Climate Action Tracker. . Credible targets set by companies are, Our solution therefore, a way to identify both the opportunities The results indicate that LDI is the biggest overall certain companies face to improve their alignment For the 昀椀rst phase of the project in summer 2021, we contributor to the Fund’s ITR (see chart right). However ITR baseline contribution by desk to Net Zero, and the risks others face if they don’t analysed our public equities and bonds (including LDI, the relative strength of UK climate policies means that UK adopt a feasible strategy to become aligned. See page sovereigns and corporates across both developed and LDI assets contribute to a lower overall ITR (although we 26 for our current exposure to companies that have emerging markets), and real estate portfolios. As a starting note that even the UK is not yet deemed to be aligned committed to or set science-based targets. point, we applied one of the open-source methodologies with 1.5°C). But we can also see that a lot more needs to referenced in the NZIF. However, its default implied be done by both corporates and governments, especially We are now highlighting the parts of our Fund where temperature rise (ITR) of 3.2°C for all companies without in emerging markets. We cannot address this in isolation, the greatest need to transition lies, and identifying a disclosed targets, regardless of their sector or current but we can undertake targeted engagement with speci昀椀c subset of portfolios, sectors and companies as our emissions, meant we were unable to identify the better issuers to encourage a shift towards a more aligned Liquids highest priority engagement targets. We will work or worse performers in speci昀椀c sectors for over 80 per trajectory, starting in many instances with better disclosure. Alternatives with our stewardship services provider EOS, with our cent of our corporate holdings by value. We therefore fund managers, and also consider direct engagement couldn’t prioritise companies for engagement, or identify Hybrid assets ourselves, to ensure this subset is held to clear and companies that were unlikely ever to align. LDI measurable progress. We will provide more detail on 6 But excluding derivatives, short positions, pure cash instruments, FX, Forestry & Farmland and holdings without lookthrough (e.g. ETFs, secondaries). how this will feed into our engagement plan in our 7 Glasgow’s 2030 credibility gap: net zero’s lip service to climate action | Climate Action Tracker next Responsible Investment Report. 8 By market value, holdings as at 31 December 2021.

13 Pension Protection Fund Climate Change Report 2021/22 STRATEGY AND RISK MANAGEMENT CONTINUED How we assess the risks and opportunities Assessing transition risks Identifying and exploiting • Real estate CASE STUDY Our climate transition scenarios As they are most widely available to us, we’re currently opportunities Construction and buildings account We continue to consider three main using the following modelling tools, methodologies A decarbonising economy presents for nearly 40 per cent of energy and Investing in an urban climate transition scenarios when and forecasts to assess the risks to our portfolios of investment opportunities as well as process-related carbon emissions stress-testing our assets. We believe transitioning to a zero-carbon global economy. risks. We are especially focused on and therefore play a core role in resilience fund 9 that a disorderly transition to Net seeking opportunities where real assets global e昀昀orts to decarbonise . Zero is likely to have a di昀昀erent • MSCI ESG’s Portfolio Climate Value-at-Risk (VaR) – can contribute positively to the global According to the IEA, in order to More than half of the world’s population live in cities impact on assets from an orderly see further detail and advances in the MSCI ESG transition to Net Zero, as well as o昀昀er meet the target of carbon neutrality but urban infrastructure and resilience are increasingly transition. We also feel it is prudent Climate VaR tool on page 23 adaptation and resilience to the impact by 2050, all new buildings and 20 being tested by rapid urbanisation and the impacts of to consider a failed transition • IEA scenarios (from its Energy Technology of a warming climate: per cent of existing ones would climate change. To address this, we invested this year scenario too. Perspectives report), available through the open- need to be zero-carbon-ready as alongside world-leading organisations in a new urban • F orestry 10 source Transition Pathway Initiative (TPI) and the soon as 2030 . resilience fund. The fund will look to invest in 昀椀ve Paris Agreement Capital Transition Assessment Sustainable forestry is one of the areas (see below). The fund is seeking to align with the • Paris Disorderly, or Late Action: (PACTA) tools few viable, nature-based solutions R eal estate accounts for just under Paris Agreement alongside having dedicated resilience A sudden disorderly transition to deliver carbon sequestration six per cent of the total NAV of our objectives, which will measure its contribution to the • The PRI’s Forecast Policy Scenario under its Inevitable and help mitigate CO emissions. investment portfolio. In line with UN SDGs (with a carried interest linked mechanism to a temperature rise of 1.5°C or Policy Response 2 our overall approach to climate below 2°C by 2100. Well-managed and certi昀椀ed forests to resilience / impact objectives). As such it will also Every tool complements each other but we are primarily also contribute to biodiversity risks, consideration and assessment seek to qualify for Article 9 fund status under the • Paris Orderly, or Early Action: using MSCI Climate VaR to inform our climate risk and help adapt to climate-related of transition and physical risks Sustainable Finance Disclosure Regulation (SFDR). An orderly transition in line management across the listed portfolios as its coverage physical risks such as 昀氀ooding and in our Real Estate portfolio are The fund’s 昀椀nancing model is novel in combining with the Paris Agreement that is comprehensive. We use TPI and PACTA to support this soil erosion. Over the year, our a vital part of our approach. As institutional capital with that of development 昀椀nance limits global warming to 1.5°C with additional analysis on speci昀椀c high-impact sectors. investments in forestry have grown our real estate investments are institutions, enabling it to meet di昀昀erent risk pro昀椀les or below 2°C by 2100. by 20 per cent to approximately predominantly managed externally, whilst ensuring stability. The manager will track a suite As mentioned earlier, we have also started asking our £1 billion. As well as reporting our focus is on ensuring robust of metrics related to the carbon footprint of assets, • Failed Transition, or No Liquids managers to report transition scenario analysis on certi昀椀cation progress, all of monitoring and oversight of our labour standards and community development. Our Additional Action: Continuation as part of the enhanced TCFD data we require from our external fund managers now managers’ capabilities. See page 26 investment is targeted towards OECD countries. of current trends, with little-to- them, to compare and contrast with our own results. provide some data on carbon for more detail. no transition, leading to at least sequestration across our forestry • Opportunities through The fund’s investment focus 3–4°C rise in temperature by 2100. Assessing physical risks assets. See page 27. low-carbon technologies We continue to inquire how our fund managers are • Infr astructure We use the MSCI Climate VaR tool • Urban mobility and related services assessing physical and adaptation risks across our Sustainable infrastructure is an to identify how listed companies • Energy transition and adaptation of portfolios, especially among our real assets. attractive opportunity, both helping exposed to opportunities from low- existing services Physical risk analysis is one area where we have to reduce the carbon emissions carbon technologies might bene昀椀t seen slower progress over the year than intended, related to economic development our portfolios in the future under • The built environment (schools, hospitals, mainly due to a lack of usable external tools and the and providing communities with various scenarios. public/community infrastructure) additional resource required. However, we have seen greater resilience to the impacts of T echnology opportunities are improvements in the MSCI Climate VaR tool to further climate change. identi昀椀ed based on a company’s • Smart city solutions incorporate physical risks over the year, and we have We invest with infrastructure current green revenue estimates • Circular economy and resource management been leveraging this in our assessments of our Equities, managers that take a diligent and and low-carbon technology Global Credit and UK Credit portfolios – see page 24. robust approach to measuring capacity. MSCI estimates current climate risks and who are able green revenues based on a to report on their progress. This Sustainable Impact classi昀椀cation of year, we invested in a pioneering the company’s products and uses urban resilience fund to support patents as a proxy for low-carbon 9 “The buildings and construction sector accounted for 36% of 昀椀nal technology capacity. MSCI allocates energy use and 39% of energy and process-related carbon dioxide cities in delivering critical resilience (CO ) emissions in 2018, 11% of which resulted from manufacturing future green revenues (and future 2 infrastructure projects – see case building materials and products such as steel, cement and glass”. Global study, right. green pro昀椀ts) to each sector and Status Report for Buildings and Construction 2019 – Analysis - IEA then each company gets a share of 10 “buildings remain o昀昀 track to achieve carbon neutrality by 2050. the revenues based on its current To meet this target, all new buildings and 20% of the existing building market share and its modelled stock would need to be zero-carbon-ready as soon as 2030”. Tracking patent share. Buildings 2021 – Analysis – IEA

14 Pension Protection Fund Climate Change Report 2021/22 STRATEGY AND RISK MANAGEMENT CONTINUED Summary of our progress in assessing climate risks across asset classes The following table summarises METRIC TYPE ASSET CLASS WHAT IS MEASURED? the progress we’ve made over the year using various metrics to measure our climate-related risks Absolute carbon emissions apportioned (using EVIC) to PPF’s holdings (tonnes CO e) Carbon emissions 2 in each asset class. Corporate Bonds & Equity Relative carbon intensity apportioned (using EVIC) to PPF’s holdings, normalised by amount invested (tonnes CO e/USDm) 2 Corporate Bonds & Equity Weighted average carbon intensity of PPF’s holdings, normalised by revenues Sovereign Debt (UK only) (corporates) or PPP-GDP (sovereign), (tonnes CO2e/USDm) Real Assets Carbon metrics – work in progress Climate Value-at- Transition risks – policy risk costs, technology opportunities (% of Enterprise Value) Risk (CVaR) Corporate Bonds & Equity Physical risks (% of Enterprise Value) Sovereign Debt Climate VaR metrics – work in progress Real Assets Climate VaR metrics – work in progress Green revenues Equity (passive only) Revenues generated from green business activities (% of revenues) Portfolio alignment Corporate Bonds & Equity % of portfolio companies committed to the Science Based Targets initiative (SBTi) or other science-based targets Corporate Bonds & Equity Sovereign Debt (UK only) Implied Temperature Rise, expressed in °C (by 2100) Real Assets Private companies

15 Pension Protection Fund Climate Change Report 2021/22 STRATEGY AND RISK MANAGEMENT CONTINUED How we manage the risks Considering the positioning of We are also adopting the Institutional Engaging with non-responsive issuers CASE STUDY our portfolios Investors Group on Climate Change We are active supporters of CDP, As detailed in the case study on page (IIGCC)’s Net Zero Stewardship Toolkit, a not-for-pro昀椀t organisation that Climate Action 100+ 16, we have moved to a low-carbon which was launched in April 2022. runs the global environmental equity benchmark to actively manage This aims to raise the bar for investor disclosure system in three key our equity positioning in relation to climate stewardship by providing a areas: climate, water and forests. We are a signatory to Climate Action 100+, the largest-ever the energy transition. Alongside our systematic framework that focuses CDP’s Non-Disclosure campaign, investor engagement initiative on climate change, involving passive mandates that closely track investors on ensuring they prioritise through collaborative engagement around 700 investors in 33 markets who collectively hold half this benchmark, we have also seen high-impact engagement while e昀昀orts among investors, aims to of the world’s assets under management. an indirect feed through into the systematically ensuring they have persuade non-responsive companies Climate Action 100+ puts pressure on the world’s largest positioning of our active quantitative measures in place to hold laggard to take action and report to the emitters, which together account for approximately 80 per cent equity strategies. companies to account. CDP questionnaires, depending on of global industrial emissions. Our RI reports provide more detail on which of its three focus areas are We use the information reported to material to their business activities The initiative published its 2021 Year in Review: A Progress us by our managers in our quarterly the stewardship activities and progress or supply chains. Update in March 2022. The review found that, largely as a result ESG templates to review any material of EOS, our fund managers and any of Climate Action 100+, 52 per cent of targeted companies risks highlighted by them and compare direct or collaborative engagements Earlier this year, we identi昀椀ed the have made Net Zero commitments and a substantial 72 per these reports against our own internal we have carried out. This includes companies across our listed portfolios cent now report in line with TCFD recommendations. Some monitoring. This has allowed us activities related to climate issues. that have not responded to CDP in examples around the world include: to have much more constructive Industry collaboration recent years. As we prefer engagement discussions in our manager review with companies to assist them in meetings, so that we can understand We continue to participate in climate- their Net Zero journey instead of • In It aly, Enel, the biggest utility company in the world, their investment theses and potentially focused memberships and networks, divesting, we are currently involved has committed to being Net Zero by 2040 solely by using challenge them on their assumptions such as the IIGCC and the ongoing in this campaign to encourage over renewables (with zero reliance on o昀昀sets or negative where necessary. The stewardship Climate Action 100+ initiative – see 700 non-disclosing companies to emissions removal technology) sections of our manager reporting the case study, right. We are carefully respond to CDP, either via leading the template also provide us with more reviewing the di昀昀erent frameworks engagement ourselves or supporting it. • The Chinese national oil comp any Sinopec has committed detail on how our managers are available for aligning our portfolio to be carbon neutral by 2050 – 10 years earlier than China engaging with issuers or policy- with Net Zero (e.g., the IIGCC Net We will assess the progress made on makers, and highlights on progress Zero Investment Framework, the UN this engagement campaign once the • The Austr alian company Boral is the 昀椀rst cement company made or speci昀椀c escalations taken. Net Zero Asset Owners Alliance, and annual reporting period closes and to commit being aligned with 1.5°C in its Scope 1 and the Science Based Targets initiative). the results are published at the end 2 emissions Stewardship and engagement We are thoughtfully considering their of the year. • R olls Royce, the FTSE 100 aerospace and defence company, We engage heavily with our external respective recommendations for Establishing our voting guidelines is committed to making all its civil aero-engines compatible managers to encourage ongoing di昀昀erent asset classes to ensure any on climate change with 100% sustainable aviation fuel by 2023 and has improvements in their approaches chosen framework can be realistically embedded this target into its executive remuneration policy to managing climate risks and to applied to how we manage our assets As mentioned in the previous section, ensure they continue to meet our high across a highly diverse portfolio. we drafted new voting guidelines • The S outh African chemicals company Sasol has set a target standards in this area. In addition, our during the year to summarise some to be Net Zero by 2050 stewardship services provider EOS of the key escalation situations where prioritises climate risk and opportunity we will consider voting against • US ener gy company Phillips 66 is the 昀椀rst oil re昀椀ner to include management in their engagement management on issues including Scope 3 emissions in its target (aiming to reduce the carbon with issuers, which feeds into voting climate change. See Appendix F to see intensity of its energy products by 15 per cent by 2030). recommendations at company AGMs. an overview of these new guidelines. Although the success of this initiative has been encouraging, there is a long way until companies fully align their capital expenditure with a 1.5°C world and achieve high-level performance across all indicators assessed by Climate Action 100+. Lots more work needs to be done.

16 Pension Protection Fund Climate Change Report 2021/22 STRATEGY AND RISK MANAGEMENT CONTINUED CASE STUDY Moving to our climate-aware equity benchmark As reported in our 2021 Climate Change Report, we transitioned to a new equity benchmark, the FTSE Custom All-World Climate Minimum Variance Index, in order to help us recalibrate our overall Equity portfolio’s exposure to carbon-intensive companies. How it works Companies are excluded from the index where: Impact on our carbon exposure Change in high-impact sector allocations This new index considers three constraints in its As well as being the benchmark that our passive mandates construction to mitigate some exposure to climate- – Mor e than 25 per cent of revenues come from now track, the climate-aware index is also the reference related risks: a 50 per cent reduction in scope 1 and 2 coal extraction and performance benchmark for all of our active carbon emissions, a 50 per cent reduction in fossil fuel equity mandates. Benchmark 2021 = FTSE Custom All-World reserves and an increase in ‘green revenues’. – Mor e than 50 percent of revenues come from coal Climate Minimum Variance Index power generation (or 25–50 per cent where the Moving to this new benchmark has reduced the carbon The purpose of the index is not to divest from sectors company’s TPIMQ level is less than ‘3’) footprint embedded in our index by over 75 per cent, such as Oil and Gas. However, we want to limit our while remaining closely aligned to the investment style exposure to signi昀椀cant contributors whose management – Mor e than 50 per cent of revenues come from oil and of the parent index. It has also led to nearly a 50 per cent quality around climate change is considered to be gas and the company’s TPIMQ level is less than ‘3’. reduction in the overall carbon footprint of our Equity Materials 5% lagging the industry. We aim to remain engaged and book11. This has been achieved predominantly through our Energy 1% supportive of companies that are critical to a successful Benchmark sector breakdown – before and after passive mandates, but also indirectly through our active Utilities 4% energy transition while also identifying companies that The aim of the new index is to limit exposure to individual systematic strategies. In particular, the risk exposure of do not seem prepared or able to adapt to a Net Zero climate laggards rather than exclude whole sectors. As the our equity book to thermal coal revenues (which might Other 90% world. The new index therefore also incorporates the graphs right show, there have only been slight changes in pose an elevated risk of assets becoming stranded at some Transition Pathway Initiative’s Management Quality high-impact sector weights. point) has reduced from 昀椀ve per cent to two per cent. (TPIMQ) level to assess the management quality of Our minimum standards exclusion policy has also been companies in fossil fuel sectors. integrated into the index design, removing exposure to controversial weapons. Benchmark 2020 = FTSE All-World Minimum Variance Index 75% drop 50% drop 5% 2% No in Equity in PPF exposure to controversial Materials 7% index carbon Equities thermal coal weapons Energy 3% footprint carbon revenues footprint Utilities 6% Other 84% 11 Based on Financed Carbon Emissions Intensity – see Appendix D for details.

17 Pension Protection Fund Climate Change Report 2021/22 Metrics and targets This year, we have seen material improvement in both the of our external fund level of disclosure of carbon data and the level and intensity managers are now signed of emissions for our Equities portfolio – the latter resulting 25% from the move to our new climate-aware equity benchmark. up to the Net Zero Asset Our task now is to maintain this positive trajectory and work Managers initiative towards similar change across other asset classes. Metrics on our external managers As the ASCOR tool is still being developed, we are putting Supported by our engagement, 25 per cent of our external our e昀昀orts into assessing our sovereign exposure with fund managers are now signed up to the Net Zero Asset existing tools, data and methodologies where we can. After Managers (NZAM) initiative, part of the Glasgow 昀椀nance reviewing the latest draft consultation from the Partnership group convened at COP26. This includes some Alternatives for Carbon Accounting Financials (PCAF), we decided to managers in Private Equity, Infrastructure, Property and calculate our own sovereign carbon emission intensity Forestry. Meanwhile, three of our private equity managers metric for our LDI portfolio. have committed to Science-Based Targets as part of the We have started by calculating the sovereign emission newly-launched SBT initiative – see page 26. intensity of the physical UK gilts held in our LDI portfolio. After requiring our Liquids managers to start reporting to In line with PCAF’s consultation, we chose UK Production us quarterly using our ESG portfolio templates last year, we Emissions including LULUCF (Land Use, Land-Use Change 12 have now asked them to enrich the range of TCFD-based and Forestry) as an approximation of emissions . See the metrics on climate, as detailed on page 10. Over a quarter Relative Carbon Intensity section below for the results of of the managers were able to provide this additional data our analysis. Note that we have reported sovereign carbon in our January 2022 review meetings. The majority are emission intensity on a standalone basis and are not expected to comply by the end of Q2 2022. comparing or aggregating this with other asset classes, due to methodological di昀昀erences. Measuring carbon and climate risks for sovereigns We aspire to incorporate sovereign 昀椀nanced emissions We acknowledge the di昀케culties in assessing sovereign into our analysis. We will continue evaluating di昀昀erent bonds comprehensively as there is still a lack of suitable approaches (e.g. territorial; consumption versus methodologies and (often a lag in) data availability. We production-based) and closely watch for the latest strongly welcome various e昀昀orts to track the carbon developments in this area. footprint and climate risks of sovereign debt and are supportive of the establishment of the ASCOR project by the PRI to develop a robust assessment framework for sovereigns. 12 We decided to include LULUCF, despite the ongoing debate of the potential distortion it might have, to have a more complete overview (which is also in line with PCAF’s recommendation). As we want to be consistent with PCAF, we have used GDP-PPP Adjusted as the denominator following PCAF’s recent consultation on this.

18 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED Absolute carbon emissions Again this year, we measured the Our total 昀椀nanced emissions in this total operational Scope 1 and Scope portion of our portfolio have dropped Digging a bit deeper into the The companies themselves Next steps 213 carbon emissions associated with by 35 per cent from over 1.2 million reduction in total 昀椀nanced decarbonised by four per cent over our liquid investments in global equity tCO e to less than 797,000 tCO e. This emissions for Equities, the below the year, however we suspect that Our focus going forward will be on engaging with a priority list of holdings 2 2 (‘Equities’), global investment grade is primarily coming from the Equities chart shows that the majority of this this is mainly explained by the e昀昀ect to deliver real economy decarbonisation of their emissions, as detailed in our (IG) and emerging market (EM) credit portfolio – where the total 昀椀nanced reduction was driven by changes of pandemic-related lockdowns Paris Portfolio Alignment Project – see page 12. (‘Credit’) and the publicly-traded UK carbon emissions of our Equities in the Equities portfolio holdings, during 2020 (on which most of the credit sleeve within our internally- portfolio (which includes both passive largely as a result of the equity emissions data is based). Assessing Scope 3 emissions managed hybrid assets (‘UK Credit’). and active mandates) has halved over benchmark change during the year. Our focus on understanding Scope 3, as well as Scope 1 and 2, emissions has Collectively, this accounts for just over the year – although the UK Credit increased through the year. However, the Scope 3 reporting from companies is US$14.5 billion of our overall assets and Credit portfolios also saw small Causes of change in PPF Equities 昀椀nanced carbon emissions still lacking. For example, the TPI’s 2021 assessment of the energy sector found under management – or just under a declines. Lockdowns during the between 2020 and 2021 that less than half of Oil and Gas producers are providing Scope 3 disclosure, third of our overall AUM. See Appendix Covid-19 pandemic will have reduced even though it is the largest source of their emissions. D for full calculations. emissions, plus there may be some impact from decarbonisation and We are starting to take account of Scope 3 emissions e昀케ciency e昀昀orts by companies too. in two key ways: 1. In our Equit y benchmark – Scope 3 disclosure is a key requirement in Our total 昀椀nanced emissions in tonnes for 2021 for listed equity and credit % the TPI’s Management Quality assessment, which directly feeds into our Equity benchmark (see page 16) and our voting decisions, as well as other Scope 1+2 benchmark analysis such as the Climate Action 100+ Net Zero benchmark. emissions PPF AUM Carbon data (tonnes assessed coverage 2. In our N et Zero alignment assessments – As part of our Paris Portfolio COe) ($m) (Scope 1+2) Alignment Project, we are assessing the full spectrum of emissions 2 Equities 395,353 6,090 99% including Scope 3 upstream and downstream. We feel this is critical to Credit 321,205 6,451 89% understanding how aligned or misaligned a company is, and what they are enabling. We expect companies to re昀氀ect Scope 3 emissions in their UK Credit 80,412 1,981 80% target setting if it is material. We take this into serious consideration when Total 昀椀nanced emissions 796,970 14,522 Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; deciding whether to support a company’s climate transition plan or not in no further distribution. our voting activities. Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution. Our sovereign holdings are Year-on-year change in our total 昀椀nanced emissions for listed equity currently not considered in scope and credit for aggregating our total 昀椀nanced emissions. This is because the 1,400,000 accounting methods for 昀椀nanced 94,378 emissions for sovereign bonds are ed 1,200,000 still in draft form, and the general t a 1,000,000 329,106 recommendation is not to aggregate m i t 80,412 sovereign and corporate emissions es2 800,000 796,972 together (due to issues with O 600,000 321,205 f C double-counting). s o e 400,000 n 395,353 n o 200,000 T 0 2020 2021 Equities Credit UK Credit Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution. 13 Based on the de昀椀nition set by the Greenhouse Gas (GHG) Protocol

19 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED Relative carbon Equities portfolio: carbon intensity metrics UK Credit portfolio: carbon intensity metrics intensity The December 2021 carbon footprint analysis for our listed Equities aggregate shows substantial The availability of reported carbon data for our UK Credit holdings is lower than for our other two progress from our 2020 footprint analysis, with our weighted average carbon intensity (WACI) portfolios, however we are engaging with a number of issuers to request more disclosure from them. declining by 37 per cent year-on-year. The WACI of the Equity benchmark reduced by over 70 per All three carbon intensity metrics have remained broadly unchanged year-on-year, which is to be We continue to use three key metrics cent as a result of the transition to our new climate-aware equity benchmark. This had the direct expected due to the longer holding periods and low turnover of this portfolio. to assess the relative emissions-based e昀昀ect of reducing the WACI of our equity passive mandates by the same amount, as anticipated. intensity of our portfolios, giving us a fuller picture and allowing us to PPF Equities carbon metrics PPF UK Credit carbon metrics measure di昀昀erent asset classes and di昀昀erent sizes of portfolio on a like- 350 350 for-like basis. See Appendix D for an c c i i r r explanation of each of these metrics. t 300 t 300 e 299 e n m250 n m250 o 257 o i i l l l 243 l i 226 i m 200 m 200 r $ r $ e 150 e 150 175 170 e p2 151 154 e p2 153 153 O 100 122 125 O 100 C C s s e 83 e n 70 n n 50 65 n 50 47 To 30 To 41 0 0 PPF 昀椀nanced Benchmark PPF 昀椀nanced Benchmark PPF weighted Benchmark PPF 昀椀nanced carbon emissions PPF 昀椀nanced carbon intensity PPF weighted average carbon emissions 昀椀nanced carbon carbon intensity 昀椀nanced carbon average carbon weighted average (tCO e/$m invested) (tCO e/$m revenues) carbon intensity 2 2 (tCO e/$m emissions (tCO e/$m intensity (tCO e/$m intensity carbon intensity 2 2 2 invested) (tCO e/$m invested) revenues) revenues) December 2020 December 2021 2 December 2020 December 2021 Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution. Assessing our UK Gilts exposure Credit portfolio: carbon intensity metrics As explained earlier in this section, we have attempted for the 昀椀rst time to footprint the £15 billion This is the second year we have included the corporate bonds in our Strategic Cash, IG Credit, EM of physical UK Sovereign holdings in our LDI book, following a similar approach to that taken by 14 Debt and Absolute Return portfolios as an aggregate. The WACI of our global Credit portfolio the Bank of England in their latest TCFD report, and the recently proposed approach in the PCAF declined by 58 per cent over the year, driven largely by our strategic cash portfolio. The 昀椀nanced draft consultation for sovereign bonds. We show the 昀椀gures in both GBP and USD. carbon emissions and 昀椀nanced carbon intensity remained largely unchanged. Through this analysis we are pleased to see a year-on-year reduction of the emissions intensity for the UK from 152 tCO 15 e/USDm to 145 tCO e/USDm (emissions tonnes per $ GDP) . PPF Credit carbon metrics* 2 2 UK Sovereign holdings: carbon intensity estimate c 350 i r 250 t 300 318 e n m 279 n 228 o 250 255 P i 221 i D 200 211 l l i n Gy m 200 o c 14 PCAF’s draft new methods 204 203 i n r $ 192 193 l l for public consultation e i re 150 150 r 156 152 (carbonaccounting昀椀nancials.com) e p r mu 145 2 e c O 133 t 15 Note that UK Sovereign carbon emissions n C100 e p2a100 s v are reported on a two-year lagged basis, so e O e n 85 70 Cl Dec-21 昀椀gures are based on 2019 emissions, n 50 53 s re To 50 e 50 Dec-20 on 2018 emissions, etc. We decided n to include LULUCF, despite the ongoing 0 n debate of the potential distortion it might PPF 昀椀nanced Benchmark PPF 昀椀nanced Benchmark PPF weighted Benchmark To bring, to have a more complete overview carbon emissions 昀椀nanced carbon carbon intensity 昀椀nanced carbon average carbon weighted average 0 (tCO e/$m emissions (tCO e/$m intensity (tCO e/$m intensity carbon intensity UK Sovereign carbon intensity UK Sovereign carbon intensity (which is also in line with PCAF’s 2 2 2 (GDP expressed in GBP) (GDP expressed in USD) invested) (tCO e/$m invested) revenues) revenues) recommendation). To be consistent with 2 PCAF, we have used GDP-PPP Adjusted December 2019 December 2020 December 2021 (constant 2017 prices) as the denominator December 2020 December 2021 following PCAF’s recent consultation on this.

20 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED High carbon impact sectors Next steps In line with TCFD recommendations, The Credit portfolio saw a similar we pay particular attention to contribution from Utilities to last year. As part of our Paris Portfolio our exposure to sectors that have Alignment Project (see page 10), a higher contribution to global We continue to engage with these we are identifying companies carbon emissions. Guided by these sectors – both directly and through that are our highest priority 16 our external managers – to transition engagement targets in the recommendations , we have focused on the Utilities, Materials to lower-carbon activities. As pro昀椀led transition to Net Zero, which and Energy sectors. on the case study on page 15, we will include many in these three continue to be an active signatory to high carbon impact sectors. We Consistent with last year, Utilities the Climate Action 100+ initiative to will work with our stewardship contributed the most carbon emissions ensure the world’s largest corporate services provider EOS and to our UK Credit portfolio. However, the greenhouse gas emitters take external fund managers to sector now contributes just 19 per cent necessary action on climate change. ensure this subset is held to of carbon emissions to our Equities clear and measurable progress, book (compared to 42 per cent last through both company level and year) as a result of our move to our sector level engagement. new climate-aware equity benchmark. Contribution to overall portfolio carbon emissions by high-impact sectors Equities Credit 9% Utilities now 19% 27% 13% contributes just 19 per cent of carbon 13% emissions in our Equities book. 23% 31% 65% UK Credit 51% Utilities Materials Energy Other 49% 16 Ener gy, Materials and Buildings, Transportation and Agriculture, Food and Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution. Forest Products are identi昀椀ed by the TCFD as accounting for the largest proportion of GHG emissions, energy usage and water usage.

21 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED Exposure to fossil fuel activities Weight of holdings owning fossil fuel reserves in 2021 The risk of fossil fuel assets becoming Credit portfolio 14% stranded is a signi昀椀cant concern for Over the year, we have seen a o i12% investors, with the most carbon- l reduction in the exposure to fossil o 5.3% f intensive assets likely to su昀昀er fuels reserves owners in the Global t or10% sudden devaluations, write-downs or Credit portfolio, and especially in the p n i 8.4% conversions to liabilities. As part of our exposure to thermal coal owners from t 8% 4.0% h climate risk assessment, we therefore 0.3 per cent to just 0.1 per cent. The g closely monitor our portfolio exposure wei6% 6.3% 5.3% potential emissions from reserves have t to fossil fuel reserves overall and by also decreased year on year by around 86% en 4.8% c4% 3.9% 2.5% speci昀椀c fossil fuel type. 23 per cent. er 2.4% reduction in our P 1.7% The Russia-Ukraine war, and energy 2% 1.1% 1.7% and cost of living crises are creating UK Credit portfolio 0.9% 1.0% 0.3% 0.1% 1.3% 1.6% further volatility and uncertainty as The exposure to fossil fuel reserves Equities passive 0 owners has been reduced by around Equities Equities Credit Credit UK Credit to how scenarios will play out. We portfolios potential benchmark benchmark believe thermal coal still faces a higher 25 per cent in total over the year, and likelihood of asset-stranding in the the potential emissions from reserves embedded emissions Overall weight of companies owning any reserves Thermal Coal Gas Oil short to mid term, particularly for OECD has signi昀椀cantly declined by 99 per countries. But we anticipate that oil and cent. Both decreases were mainly from reserves gas production outside of Russia may driven by a reduction in oil and gas now have some shorter-term support holdings in the portfolio. as it seeks to meet the shortfalls created Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution. by a loss in Russian supply. Note on the calculations Equities portfolio The ‘Overall weight of companies The move to our climate-aware owning any reserves’ is not Potential emissions from reserves and contribution by reserve type in 2021 equity benchmark has meant that always the sum of overall the weight of equity holdings in the weight of companies owning 25,000,000 thermal coal, gas and oil reserves e benchmark (and therefore our passive individually. This might be O2 equity portfolios) owning fossil fuels because a company might have s C 19,411,635 20,311,109 reserves reduced from over four per e20,000,000 exposure to more than one type n n cent last year to less than 2.5 per cent of reserve, so its total weight will o this year. However, the overall weight n t 39% appear in all types of reserves. s i 32% of companies owning any fossil fuel n o15,000,000 Additionally, a company might be i s reserves for our aggregated Equities s identi昀椀ed as having some type(s) i portfolio is broadly unchanged (6.3 per of reserves but the contribution m 20% 10,315,599 d e cent vs 6.1 per cent last year) as the e10,000,000 to potential emissions might not d signi昀椀cant reduction within our passive d 34% be considered if there is a lack of e portfolios has been o昀昀set by our active b 52% transparency from the issuer on m equity portfolios. l e5,000,000 a their reserves type. i 48% t 58% n e The potential emissions from reserves t 875,221 o 2,253 in the passive portfolios has been P 9% signi昀椀cantly reduced by around 86 per 0 cent and the contribution from thermal Equities Equities Credit Credit UK Credit benchmark benchmark coal has been slashed by 99 per cent – from 3 million tCO e to 35,894 tCO e. 2 2 The contribution from thermal coal has Potential emissions from fossil fuel reserves Contribution from… Thermal coal Gas Oil also reduced in the aggregated Equities portfolio by 11 per cent. Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution.

22 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED Disclosure rates and data quality The reported carbon emissions This is a welcome result, giving us This again highlights the di昀케culty in by market value have increased more comprehensive data points for a assessing credit issuers accurately. considerably for our Credit portfolio greater proportion of our portfolio to We are working to identify the drivers year on year (from 49 to 60 per cent) enable us to conduct more accurate behind the increase in emissions that and for our Equities portfolio (from carbon assessments. The remainder aren’t covered, as well as the increase 75 to 81 per cent) and marginally for is modelled by our ESG data provider in the contribution to emissions from our UK Credit portfolio (from 63 to 65 where possible, or else the company estimated sources and will liaise with per cent). This means, for example, is classi昀椀ed as not covered. our managers and service providers to that 81 per cent of the carbon data for assist them in their continuous e昀昀orts our Equities is reported by companies Although the percentage of reported to engage with companies. themselves, based on market value. emissions for the Credit portfolios has gone up, so has the percentage of emissions not covered (versus a decrease for the Equities portfolio). Year-on-year comparison of carbon emissions disclosure rates (by market value) 100% 1% 2% 7% The increased reporting 18% 23% 11% 20% 19% 29% 44% on carbon emissions by 80% 81% 15% 18% companies is a welcome 75% 60% 60% 65% 63% result, giving us more 40% 49% comprehensive data points. 20% 0 2021 2020 2021 2020 2021 2020 Equities Credit UK Credit Reported Estimated Not Covered Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution. Year-on-year comparison of contributions to total carbon emissions by source of data 100% 5% 6% 17% 25% 38% 9% 95% 91% 94% 80% 83% 75% 60% 62% 40% 20% 0 2021 2020 2021 2020 2021 2020 Equities Credit UK Credit Reported Estimated Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution.

23 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED Forward-looking scenario analysis We are keen to look ahead and assess how our portfolios might be a昀昀ected in the future by climate change. To do this, we deploy a number of tools to quantify the risk posed to our Physical VaR investments and the quality of action being taken by companies. On the We have seen improvements in the following pages we pro昀椀le two tools whose application we have advanced We not only examine MSCI Climate VaR tool regarding over the past year: the MSCI Climate Value-at-Risk (CVaR) tool and the Transition physical risks and we have been Pathway Initiative (TPI) tool. We also assess what proportion of our portfolios our portfolio in terms considering these in our assessments. comprises issuers setting science-based targets for their climate action, as part The location database used by the of our e昀昀orts to start measuring our alignment. of extreme risks, but tool now maps to approximately also opportunities 270,000 locations, including an 1. MSCI Climate Value-at-Risk expansion of the global power plant that will thrive in a database. In terms of hazards, the As an asset owner, it is important for • Policy VaR tool has undergone a number of us to stress-test our portfolio and see The highest Climate VaR under Net Zero world. updates over the last year and now how its value might be impacted in a a disorderly transition is mainly covers 10 hazards across acute and chronic types17 range of scenarios and circumstances. explained by the abrupt need . To explore the impact of climate in for a higher and faster reduction our portfolio we extensively analyse in emissions. Companies would Please note one aggregate metric: Climate Value- be required to achieve a bigger Recent updates in aspects of at-Risk (‘Climate VaR’ or ‘CVaR’). emission reduction and pay a the MSCI Climate Value-at-Risk Climate VaR comprises ‘Transition VaR’ higher assumed carbon price, physical risks methodology mean (comprising Policy VaR and Technology face higher electricity costs, and it is potentially challenging to Opportunities) and ‘Physical VaR’, which absorb higher costs from value make like-for-like, year-on-year we extrapolate in our analysis. chain totalling in a higher Policy comparisons for our di昀昀erent VaR. (Conversely a failed transition asset portfolios. We look forward Transition VaR results in low Climate VaR because to showing more reliable year- We analyse Climate VaR for each of it assumes no/minimal policy action on-year progress on CVaR in our portfolios under 昀椀ve transition is taken so companies would not be future reports. scenarios, led by our Paris Disorderly, required to decarbonise as much. Paris Orderly and Failed Transition Plus they would not be forced to identi昀椀ed scenarios. For the 昀椀rst two, move into renewable energy as we decided to further split these out quickly or at all.) into a 1.5°C and a 2°C scenario after • Technology opportunities recognising that there are signi昀椀cant We not only examine our portfolio di昀昀erences in the impact even between in terms of extreme risks, but also 1.5°C and 2°C. The highest CVaR (worst) opportunities that will thrive in a is predicted to be materialised under Net Zero world. The higher policy a Paris Disorderly transition (‘1.5°C risk that our portfolio faces in a disorderly’ and ‘2°C disorderly’). The disorderly world is o昀昀set to some lowest Climate VaR (best) is predicated extent by a higher and positive under an Paris Orderly (‘1.5°C orderly’ contribution from technology and ‘2°C orderly’) or Failed Transition opportunities. Principally, the VaR (‘3°C hot house’). model assumes that, as the world moves into a Net Zero world, 17 There are now 昀椀ve acute risks and 昀椀ve companies with low-carbon chronic risks incorporated. Acute hazards patents will achieve an excellent = catastrophic events such as coastal performance as the demand for 昀氀ooding, tropical cyclones, 昀氀uvial 昀氀ooding, renewable energy/low-carbon river low 昀氀ow, wild昀椀re. Chronic hazards = technologies increases. extreme heat, extreme cold, precipitation, extreme snowfall, extreme wind.

24 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED 18 Climate Value-at-Risk 2021 results by asset class Physical risk Technology opportunities In terms of physical risk, all three Technology opportunities are likely Equities This is because the model projects Equities Climate VaR portfolios are primarily exposed to to bene昀椀t our portfolios most in a Our Equities portfolio would see higher uptake of electri昀椀cation in the extreme heat, tropical cyclones and disorderly transition (1.5°C and 2°C) the greatest Climate Value-at-Risk transportation sector in a disorderly 60% coastal 昀氀ooding, although the sectors and least in a hot house world. Equities under a 1.5°C disorderly transition, world, and Food & Staples do not have k 37.8% most at risk do di昀昀er for each portfolio. see the highest potential bene昀椀t, many technology opportunities to s 50% followed by a 2°C disorderly i Below, we depict the top three sectors with Technology VaR contributing transition. Within our Equities book, compensate for their transition risk. t r40% that contribute the most to Physical up to a positive 15 per cent in a e a 21.0% u VaR within each asset class. 1.5°C disorderly scenario. The UK Energy and Materials are the most l exposed sectors in an orderly or Although year-on-year comparisons a 30% Credit portfolio is minimally exposed e v are di昀케cult, we are pleased to see t 1.7% failed transition. However, Food & a 20% 0.5% 7.2% to technology opportunities so its a reduction of 11 per cent for the m i Staples Retailing and Transportation l 18.2% 18.2% 18.2% 18.2% 18.2% Biggest contributing sectors expected Technology VaR is very close Equities Climate VaR year-on-year, l c a 10% to zero. are most at risk in a disorderly world. t to physical risks by portfolio based on the 1.5°C disorderly transition o T 0 scenario combined with the aggressive 3ºC 2ºC 1.5ºC 2ºC 1.5ºC Taking a more detailed sector physical scenario (which are the worst- hot house orderly orderly disorderly disorderly overview, the sector best positioned case scenarios). Food & for technology opportunities is Heavy Aggressive physical risk Transition risk Staples Manufacturing in the Equities portfolio, High Tech Manufacturing or Heavy Manufacturing in the Credit portfolio Credit or failed transition, but Household & Credit Climate VaR Equities and – depending on the scenario – Overall, Climate VaR is lower for Personal Products is most at risk in Rail in the UK Credit portfolio. Credit than for Equities, ranging a disorderly world. This is potentially 20% Telecoms Utilities For all this analysis, it is important to from 7 per cent to 18 per cent under due to higher electricity prices, value k stress that results are modelled and chain costs that the sector must s 10.3% our 昀椀ve scenarios. Transportation i 16% often based on estimates. and Energy are the most exposed absorb and low exposure to low- t r e a12% carbon technologies. u 5.3% sectors in Global Credit in an orderly l a e v 0.2% 2.4% t 8% Real a Estate m 7.3% 7.3% 7.3% 7.3% 7.3% i l l c4% a t o T 0 3ºC 2ºC 1.5ºC 2ºC 1.5ºC Credit hot house orderly orderly disorderly disorderly Aggressive physical risk Transition risk Banks Energy UK Credit However, on a relative basis, the 1.5°C UK Credit Climate VaR Climate VaR for our UK Credit disorderly transition poses the largest portfolios is substantially lower – threat to the portfolio by some margin, 4.0% Food remaining below 4 per cent even mainly arising from Transportation k 2.7% followed by Telecoms sectors. s for a 1.5°C disorderly transition. This i3.0% is likely due to the high allocation to t r e a u Financials in the portfolio. l UK a2.0% Credit e v t a 0.6% Trans- m 0.2% i l1.0% portation Telecoms 18 The Climate VaR of a company, in any given l c 1.0% 1.0% 1.0% 1.0% 1.0% scenario, is simply the present value of the a t o costs impacts in that scenario divided by T 0 the current enterprise market value of the 3ºC 2ºC 1.5ºC 2ºC 1.5ºC company. The enterprise market value is hot house orderly orderly disorderly disorderly computed as the sum of the market values of a company’s equity and debt. The book Aggressive physical risk Transition risk value of debt is used to proxy the market value of debt at the company level.

25 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED 2. The Transition Pathway Initiative (TPI) The TPI tool uses publicly-disclosed As explained earlier in this report, TPI levels for companies in our Equities portfolio Credit information collected by FTSE Russell we have used the TPIMQ level to This year, we extended the TPI analysis and validated by the Grantham inform our new climate-aware equity 160 TPIMQ coverage for to both of our Credit portfolios for the Research Institute at the London benchmark, the FTSE Custom All- 昀椀rst time. We found: School of Economics to assess more World Climate Minimum Variance 140 5.9% our Equities portfolio than 400 of the world’s highest- Index. Speci昀椀cally, the benchmark s Credit e i t emitting listed companies on now excludes any company where: i 120 has increased to 14 u 6.2% Less than 5 per cent of the Credit two measures: a) 25–50 per cent of revenues are q portfolio is covered by the TPI tool. F E100 coming from thermal coal power P per cent of market But of these holdings, the majority • The TPI Management Quality generation and the TPIMQ level is less n P 80 have a TPIMQ level of three or above. (TPIMQ) level assesses companies s i value from 12 per e than three; or b) more than 50 per cent i In addition, 60 per cent of companies n on how well management is of revenues are coming from Oil and a dealing with climate change risks, p 60 cent last year. covered have made a pledge (Paris Gas production and the TPIMQ level is m from Zero to Four Star. o Alignment / 2°C or below) and the less than three. . c 40 o 0.8% companies that are misaligned are • The TPI Carbon Performance N 0.6% currently under review for engagement. (TPICP) measure assesses Equity 20 companies on how e昀昀ective they TPI still only covers around 400+ 0.1% UK Credit are at achieving carbon reduction companies globally so not all holdings 0 MQ = 0 MQ = 1 MQ = 2 MQ = 3 MQ = 4/4* are covered. However, coverage for We achieved almost 20 per cent TPI in line with the Paris Agreement or our Equities portfolio has increased TPI Management Quality level coverage for the UK Credit portfolio. any target they’ve set. to 14 per cent of market value from The allocation to issuers with better 12 per cent last year. Additionally, a Weight in PPF Equities (%) management quality (i.e., with a TPIMQ substantially higher number of these level of three or above) is almost 17 per companies achieved a TPIMQ level of cent – out of 20 per cent achieved (i.e. three or above (78 per cent vs. 66 per 85 per cent of the covered portfolio) – 120 and there is no allocation to extreme A substantially higher cent last year). Lastly, the allocation to laggards (TPIMQ level of 0). Five out of companies that have set targets which 3.9% o align with the Paris Agreement / 2 s 100 seven companies have pledged to 2 C number of these e 3.4% i or below and only one is misaligned. t Degrees or below, or that have made i u companies received a other pledges, has remained steady q 80 F E TPIMQ Management at 4.4 per cent (compared to four per P cent last year). However, we have n P 60 s i e observed that many companies have i Quality level of n a improved their alignment from the less p 40 ambitious Paris pledges to the more m 0.5% three or above. o ambitious below two degrees. . c o N 20 0.4% 0 Not assessed/ Not Paris/ 2 Degrees no disclosure aligned other pledges or below TPI Carbon Performance assessment Weight in PPF Equities (%)

26 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED 3. The Science-Based Targets Other asset classes CASE STUDY initiative (SBTi) We are committed to considering the In 2021, after repeated engagement Climate action plan for impacts of climate change across all from us, we also saw these managers Our Real Estate AUM in numbers US real estate assets The Science-Based Targets initiative Through engagement with our investments. We have focused 昀椀rst become PRI signatories. We continue While Europe has been generally (SBTi) is a partnership between companies directly and with our on analysing ‘Liquids’, such as Equities to encourage all our managers to ahead of the US in terms of CDP, the United Nations Global external fund managers we will and Credit, as these asset classes further elevate their ability to measure, 100% climate awareness, as well as Compact, World Resources Institute target an increase in this proportion. are the most measurable, have the collect and report data. We are pleased availability of data and tools (WRI) and the World Wide Fund for Currently our Credit book is lagging greatest depth of data (in the case of to see, for example, that physical risk for climate management, we Nature (WWF). It aims to provide its benchmark, with less than a Equities) and are where action is most assessment is a priority for all our is under transition and physical are delighted to see the work companies with a clearly-de昀椀ned 昀椀fth of market value exposure to expedient. However, we are striving to real estate managers, with progress climate risk assessment by our performed on our US real path to reduce emissions in line with issuers with SBTi commitments improve the reporting of other assets, on performing assessments and managers estate assets. the Paris Agreement goals by setting or approved targets which is likely especially in the real assets space. developing tangible plans for action. ambitious, science-based emissions due to the higher allocation to the Our US manager has conducted reduction targets. Financials sector. Real estate Measuring our real estate a robust assessment of risks, carbon footprint 95% measuring the carbon footprint This year we used a new dataset Outside of this analysis, three of our As discussed earlier in this report, We aspire to be able to measure the and thus the risk to assets being within the MSCI ESG platform Private Equity managers have also construction and buildings/real estate energy and carbon footprint of our is managed by PRI signatories stranded, as well as in-depth, to analyse what proportion of committed to science-based targets account for nearly 40 per cent of real estate assets. We have started location-based risk assessments our portfolios have exposure for private equity companies, as part energy and process-related carbon collecting data and have look-through of physical risk, quantifying the to companies that have either of the recently launched SBTi Private emissions, and therefore play a critical on the energy and carbon pro昀椀les of value at risk. committed to SBTi targets or Equity sector initiative. role in global e昀昀orts to decarbonise. individual funds. 77% had targets approved by the The consideration and assessment of On the basis of this assessment, initiative. We are pleased to see transition risks and physical risks in our However, we are not yet in a position the manager has developed a that currently around a third of Real Estate portfolio is therefore a vital to report a credible aggregated is managed by signatories to comprehensive climate action our Equities book by market value part of our RI approach. number for the overall portfolio. the Net Zero Asset Managers plan that commits it to reducing comprises companies with SBTi This is primarily due to challenges Initiative19 landlord carbon emissions by 70 commitments, which is ahead of Working with our real around tenant data transparency. per cent by 2025 and targeting our equity benchmark. estate managers Our external managers are working a more resilient portfolio with Our real estate investments are with data providers and consultants reduced climate risk exposure. Percentage of portfolio committed to SBTi or SBTi-approved targets predominantly managed externally to establish a benchmark, track 61% (by market value) so we focus on robust appointment, meaningful reductions in energy and monitoring and oversight processes develop tangible plans for action. is managed with speci昀椀c ESG 100% of our managers’ ESG and climate We welcome targeted engagement targets in place 67.7% 73.6% 82.7% 64.6% 72.9% capabilities. All of our real estate and the introduction of lease clause 80% managers now report to us annually changes (wherever jurisdictions allow) on the ESG and TCFD pro昀椀le of their to enable greater transparency around portfolios. We also use external tools tenants’ energy use. 60% such as GRESB and CRREM (Carbon 60% Risk Real Estate Monitor) to measure 40% and benchmark the performance are funds under the GRESB 32.3% 35.4% of real assets and assess the risk of survey assessment 20% 26.4% 27.1% stranded property assets. Two of our 17.3% managers have made substantial 0 progress in their disclosure and data PPF Equity PPF Credit PPF management, with one performing a Equities benchmark Credit benchmark UK Credit complete climate assessment (see US case study right). Committed to SBTi or SBTi-approved targets Rest of portfolio Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution. 19 87 per cent is managed under a speci昀椀c strategy for Net Zero management.

27 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED Forestry CASE STUDY Sustainable forestry is a key element of Forestry certi昀椀cation is vital to Funding our RI strategy as it can help mitigate ensuring good management practices, CO2 emissions by storing carbon. preserving high conservation-value a昀昀orestation This makes sustainable forestry assets forests and combating deforestation. one of the few viable nature-based It is a metric that we comprehensively In the past year, we participated in investment solutions in the journey track – see panel below to see the the seeding of a new a昀昀orestation towards a Net Zero world. Well- level of certi昀椀cation in our portfolio. fund in Scotland. managed forests can also increase Fluctuations over the years are primarily The strategy combines existing biodiversity and are more resilient driven by new acquisitions of land, productive land with newly-acquired to the e昀昀ects of climate change. especially for a昀昀orestation projects. land where new planting will take We currently invest in soft and place and contribute towards the hardwood forestry assets globally, with generation of carbon credits. We are investments in Australia, New Zealand, proud to be one of the 昀椀rst UK asset the US, the UK, Ireland, the Baltics and owners to be part of such a project. the Nordics. We work closely with Although global decarbonisation is our managers and are glad to see critical to tackling global warming, continuous progress in their practices we recognise that carbon credits and consideration of climate risks. All will remain part of the solution for of our managers have now started any hard-to-abate emissions while measuring the carbon sequestration also creating a crucial incentive to of their forestry assets. develop forestry assets as long-term sinks to sequester carbon. Certi昀椀cation of the PPF’s share of timberland 2019 2020 2021 98.2% 93.1% 98.4% Certi昀椀ed timberland in accordance with the FSC and/or PEFC Timberland in the process of certi昀椀cation 0.2% 5.8% 1.6% in accordance with the FSC and/or PEFC Land that is sustainably managed in 0.2% 0.0% 0.0% accordance with the FSC and/or PEFC, but that cannot be certi昀椀ed Other 1.4% 0.3% 0.0%

28 Pension Protection Fund Climate Change Report 2021/22 Our aspirations for the coming year We will continue to work on expanding and deepening our climate-related risk coverage, to align our portfolio to be resilient to (and supportive of) plans to keep global warming within 1.5°C. We will engage with our investment managers, issuers and other stakeholders to keep advancing standards so that we can all fully understand and manage the risks we face. Continue to work with our managers to improve Continue to integrate Continue to work to Engage with our managers, issuers and public their climate disclosures in line with our own our focus on 1.5°C global report on and reduce the policy-makers to explore ways to improve level evolving reporting requirements and industry-led warming limits across all PPF’s own operational and quality of climate risk data disclosure for standardisation initiatives and science-based targets our investment, analysis environmental impact and reporting activities, sovereigns and credit including pre-investment due diligence Using the 昀椀ndings from our Portfolio Paris Continue to work Alignment Project, develop a strategy to with industry engage with the subset of portfolios, sectors initiatives including and companies identi昀椀ed as our highest Climate Action 100+, priority engagement targets IIGCC, the CDP Non- Disclosure Campaign and others to drive action among major Work with our managers, especially in real carbon emitters assets, to explore how to improve physical and adaptation risk analysis Develop a holistic sustainability Continue to work with our Alternatives strategy as part of the PPF’s managers and support the eFront three-year Strategic Plan Outreach project to improve climate data disclosure in unlisted markets

29 Pension Protection Fund Climate Change Report 2021/22 Appendices Appendix A TCFD Pillars TCFD recommended climate disclosure Climate disclosure references Our commitment to the TCFD The Taskforce for Climate-related Financial Disclosures Governance a. Describe the board’s oversight of climate-related risks Pages 07–09 (TCFD) guidance was created by the Financial Stability and opportunities. Disclose the organisation’s Board to help companies and investors voluntarily disclose governance around climate- b. Describe management’s role in assessing and managing Pages 07–09 climate-related 昀椀nancial risks clearly, consistently and related issues and opportunities climate-related risks and opportunities reliably to help lenders, insurers and investors make informed decisions. We’ve formally supported the TCFD framework since 2018 Strategy a. Describe the climate-related risks and opportunities the Pages 10, 13 and have continually implemented it across our investment organisation has identi昀椀ed over the short, medium and long-term process. We share our progress in our annual RI reports, Disclose the actual and potential impacts which also detail our stewardship activities and work as of climate-related risks and opportunities b. Describe the impact of climate-related risks and opportunities on Pages 10, 13 an active owner of securities and real assets. on the organisation’s business, strategy and the organisation’s businesses, strategy and 昀椀nancial planning Considering the impacts of climate change on our 昀椀nancial planning where such information investments is one of the three priorities within our is material c. Describe the resilience of the organisation’s strategy, taking into Pages 12–13, 23–25 RI strategy. consideration di昀昀erent climate-related scenarios, including a 2 degree or lower scenario We’re committed to: • Implementing the TCFD We’re continuously applying and implementing TCFD Risk Management a. Describe the organisation’s processes for identifying and assessing Pages 10–13 recommendations – and are always looking for ways to climate-related risks improve transparency and management of climate risks Disclose how the organisation identi昀椀es, in our portfolio. assesses and manages climate-related risks b. Describe the organisation’s processes for managing climate-related Pages 15–16 • Assessing transition risks and physical risks risks We take a phased approach to analysing how exposed our portfolio is to risk in the global transition to a low- c. Describe how processes for identifying, assessing, and managing Pages 07–11 carbon economy, optimising relevant data as and when climate-related risks are integrated into the organisation’s overall it becomes available. We are also starting to assess risk management the physical risks that climate change presents to our portfolio, while recognising that data on this is at a very early stage. Metrics and Targets a. Disclose the metrics used by the organisation to assess climate- Pages 14, 17 • Engaging with our fund managers related risks and opportunities in line with its strategy and risk We work tirelessly with our fund managers across all Disclose the metrics and targets used management process strategies, asset classes and markets to ensure they to assess and manage relevant climate- consider, manage and report to us the climate-related related risks and opportunities where b. Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG Pages 18–19 risks and opportunities our investments might face. such information is material emissions, and the related risks • Collaborating with industry We are committed to engaging with our industry c. Describe the targets used by the organisation to manage climate- Pages 20, 22, 26 peers, policy-makers, regulators and the wider investor related risks and opportunities and performance against targets community to further best practice in climate-related risk disclosure – supporting not only the TCFD but also Climate Action 100+, the PAII and the CDP Non- Disclosure campaign.

30 Pension Protection Fund Climate Change Report 2021/22 APPENDICES CONTINUED Appendix B Appendix C PPF climate change policy Disclosure metrics from the Annual Report and Accounts Beliefs global temperature rise this century As a long-term investor, we have to well below 2°C and aim to limit the PPF Carbon Footprint Listed Equities Scope 1 & 2 Metrics 2021 2020 Change % a duty to consider all 昀椀nancially increase to 1.5°C. Metrics based on Investor Allocation (using EVIC) material risk factors in our investment Manager expectations 1. Total Financed Carbon Emissions (tCO e) 395,353 796,972 -50% decisions, including climate-related 2 factors. We believe climate change can We expect our external managers to 2. Financed Carbon Emissions (tCO e/$m invested) 65 122 -47% understand and integrate material 2 materially impact businesses, markets 3. Financed Carbon Emissions Intensity (tCO e/$m revenues) 151 226 -33% and economies globally in a number climate-related risks into their analysis 2 of ways, from a societal perspective as and investment process. This includes Metrics based on Portfolio Weights (WACI) well as environmental. undertaking carbon footprinting 4. Weighted Average Carbon Intensity (tCO e/$m revenues) 154 243 -37% and scenario analysis, assessing 2 * We’ve developed a speci昀椀c climate asset exposure to physical risks, and Equity benchmark Weighted Average Carbon Intensity 83 299 -72% change policy, as we see climate Market value of the Fund’s equities covered by CO e data (£m) 6,090 6,528 engaging with issuers, where relevant 2 change as a systemic and non- for their asset class. Proportion of the Fund’s equities for which data is available (%) 99% 98% diversi昀椀able concern that has the potential to signi昀椀cantly a昀昀ect the In monitoring the exposure and PPF Carbon Footprint Credit Scope 1 & 2 Metrics 2021 2020 Change % value of our investments across performance of our external managers, the short, medium and long-term, we’ll review how they’re managing Metrics based on Investor Allocation (using EVIC) throughout the global economy. We climate-related risks and opportunities, 1. Total Financed Carbon Emissions (tCO e) 321,205 329,106 -2% also believe that opportunities can including voting and engaging with 2 2. Financed Carbon Emissions (tCO e/$m invested) 50 53 -6% exist and be exploited for companies issuers on climate-related issues, 2 and assets well-positioned for the and how they’re reporting to us on 3. Financed Carbon Emissions Intensity (tCO e/$m revenues) 204 192 6% their actions. 2 transition to a low-carbon economy. Metrics based on Portfolio Weights (WACI) Assessment Collaboration 4. Weighted Average Carbon Intensity (tCO e/$m revenues) 133 318 -58% 2 We recognise the complexity and We also collaborate with the wider Credit benchmark Weighted Average Carbon Intensity 279 255 9% barriers to identifying and assessing the investment community on climate Market value of the Fund’s credit covered by CO e data (£m) 6,451 6,214 forward-looking 昀椀nancial materiality change issues, as a signatory to the 2 of climate-related impacts on our Principles for Responsible Investment Proportion of the Fund’s credit for which data is available (%) 89% 93% investments. However, we seek to (PRI) and as a member of the assess their exposure to climate-related Institutional Investor Group on Climate Source: Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution (PPF holdings as of 31/12/2021). Equity benchmark = FTSE Custom All-World Climate risks and opportunities through a range Change (IIGCC). We seek to encourage Minimum Variance Index. Credit benchmark = Bloomberg Barclays Global Aggregate Credit Index. of metrics and analysis, as the tools greater climate disclosure through * Equity benchmark changed from FTSE All-World Minimum Variance Index to FTSE Custom All-World Climate Minimum Variance Index on 1 August 2021. available to measure these evolve. supporting initiatives such as the CDP and the Task Force on Climate-related Metric de昀椀nitions: Consideration will be given to the • 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 are Financial Disclosures (TCFD), and 2 potential impacts on asset prices and through engaging with companies apportioned across all outstanding shares and bonds (% Enterprise Value including cash). • 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 昀椀nancing. return expectations across both short identi昀椀ed by Climate Action 100+, 2 and longer time horizons, and how so that exposure to climate risks Emissions are apportioned across all outstanding shares and bonds (% Enterprise Value including cash). • 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 responsible to this could inform our decisions around (and opportunities) can be better 2 strategic asset allocation and portfolio understood. 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 (% Enterprise Value including cash). construction. • Weighted Average Carbon Intensity (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 equivalent emissions per million $ of revenues). Reporting and engagement 2 We will seek to oversee all new and • Enterprise Value including cash (EVIC): Market capitalisation at 昀椀scal year-end date + preferred stock + minority interest + total debt. existing investment arrangements in We’ll communicate and engage on a way that takes account of climate the actions and progress that have transition and adaptation risks, as been taken around our climate change well as resilience, opportunities and strategy to relevant bene昀椀ciaries and inclusivity, in line with the 2015 Paris stakeholders, reporting in line with Agreement commitment to keep TCFD guidance for asset owners.

31 Pension Protection Fund Climate Change Report 2021/22 APPENDICES CONTINUED Appendix D Carbon metric equations Our carbon footprint calculations Total Financed Carbon Emissions in tonnes CO e: 2 We report a range of carbon Relative carbon intensity current value of investment in entity emissions-based metrics for our listed To give the fullest picture of the carbon ( Entity’s Enterprise Value including cash X entity’s GHG emissions ) global equity and credit investment intensity of our portfolio and compare holdings to align with both TCFD and di昀昀erent portfolios on as close to a Partnership for Carbon Accounting like-for-like basis as we can, we use Financials (PCAF) guidance. We are three key measures: also guided by the DWP’s work around Financed Carbon Emissions per million dollars invested proposed metrics for pension funds. • Financed Carbon Emissions per million dollars invested metric metric (may be shown in other currencies too): Although our year-end is 31 March, Measuring the Financed Carbon we review our climate exposure Emissions per million dollars current value of investment in entity metrics to 31 December. This allows invested helps us understand the X entity’s GHG emissions for the greatest coverage of climate carbon emissions being 昀椀nanced by ( Entity’s Enterprise Value including cash ) data, such as the annual corporate the size of our investment portfolio. CDP responses made available to • Financed Carbon Intensity per current portfolio value ($m) investors each autumn. million dollars revenue metric Our preferred metric for assessing Measuring the Financed Carbon carbon risk exposure on a day-to-day Intensity per million dollars of basis is the Weighted Average Carbon revenue helps us understand the Financed Carbon Intensity per million dollars revenue Intensity (WACI). We feel it gives us carbon e昀케ciency of our portfolio, the greatest coverage in 昀椀xed income i.e., how e昀케cient the companies metric (may be shown in other currencies too): where we have more signi昀椀cant are at generating output per tonne exposure, and allows us to compare of carbon. current value of investment in entity similar types of assets and portfolios, • Weighted Average Carbon ( Entity’s Enterprise Value including cash X entity’s GHG emissions ) regardless of investment size. Intensity (WACI) metric Absolute 昀椀nanced emissions As recommended by the TCFD, we use the WACI footprint to monitor current value of investment in entity For absolute carbon emissions, we our portfolios’ exposure to carbon- ( Entity’s Enterprise Value including cash X entity’s revenue ) measure the total operational Scope intensive companies. It’s 昀氀exible 1 and Scope 2 carbon emissions enough to use across asset classes (based on the de昀椀nition set by the and gives us greater coverage in Greenhouse Gas (GHG) Protocol) using 昀椀xed income portfolios. data from MSCI ESG Research. To Weighted Average Carbon Intensity calculate our apportioned ‘ownership’ of each investment, we’ve used metric (where normalisation factor is entity’s revenues, but other normalisation factors can be used): Enterprise Value Including Cash (EVIC) as recommended by the PCAF. We are also reviewing the inclusion of Scope current value of investment in entity X entity’s GHG emissions 3 emissions for some sectors where ( current portfolio value normalisation factor ) they are material, but we still feel the data is not robust enough to report on formally.

32 Pension Protection Fund Climate Change Report 2021/22 APPENDICES CONTINUED Appendix E Appendix F MSCI disclaimer Our climate change This disclosure was developed using information from MSCI voting guidelines ESG Research LLC or its a昀케liates or information providers. Although the Pension Protection Fund’s information With a speci昀椀c focus on material issues, we identify key ESG providers, including without limitation, MSCI ESG Research matters that are of particular importance in a speci昀椀c AGM LLC and its a昀케liates (the “ESG Parties”), obtain information season and highlight them through targeted engagement. (the “Information”) from sources they consider reliable, none Where we feel that companies are consistently unreceptive of the ESG Parties warrants or guarantees the originality, to engagement on certain issues, we will consider employing accuracy and/or completeness, of any data herein and escalation techniques such as voting to oppose relevant expressly disclaim all express or implied warranties, board members or resolutions. including those of merchantability and 昀椀tness for a We will consider opposing the Chair or responsible directors particular purpose. The Information may only be used for of companies that: your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for, or a • Score below a level 4 (i.e., 3, 2, 1 or 0) in the latest component of, any 昀椀nancial instruments or products or Management Quality assessment by the Transition indices. Further, none of the Information can in and of Pathway Initiative (TPIMQ level) itself be used to determine which securities to buy or sell • Have been downgraded from a level 4 to 3 TPIMQ score or when to buy or sell them. None of the ESG Parties shall over the previous assessment cycle have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, • Have a strategy that is materially misaligned with the special, punitive, consequential or any other damages goals of the Paris Agreement. (including lost pro昀椀ts) even if noti昀椀ed of the possibility of We will also consider voting against the management of a such damages. company in cases when they are not disclosing adequate climate-related information, not only to the standards of the TCFD, but to the 昀椀rst tier of climate disclosure such as CDP. See the PPF’s full voting guidelines and summary of our approach to stewardship. These guidelines are to be read in conjunction with our Stewardship Policy.

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