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.