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