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.