23 Pension Protection Fund Climate Change Report 2022/23 METRICS AND TARGETS CONTINUED UK Credit portfolio: carbon intensity metrics We are pleased to see a reduction in all the relative metrics of our internally-managed UK Credit Book this year, particularly the 30 per cent improvement in weighted average carbon intensity (WACI). We are pleased to see a Interestingly, our bought vs sold positions this year have roughly the same contribution to WACI (49 vs 48). Forty-two per cent of the UK Credit book is in new positions, and for existing positions 34 per cent reduction in all the relative saw a reduction in carbon intensity, 13 per cent saw an increase and 3 per cent were unchanged. metrics of our UK Credit PPF UK Credit carbon metrics Book this year, particularly c 350 the 30 per cent improvement i r 300 et in 昀椀nanced carbon emissions m n 250 o per $m invested. illi m 200 $ r 175 pe 150 170 e2 153 153 O C 100 118 108 Emerging Markets es This year we have made a 昀椀rst attempt to assess the n n 50 o 47 relative carbon intensity of our sovereign bonds in T 41 35 0 emerging markets, now that our data provider is able PPF financed carbon emissions PPF financed carbon intensity PPF weighted average carbon intensity to assess 100 per cent of our holdings for carbon (tCO e/$m invested) (tCO e/$m revenues) 2 2 emissions within our EM Sovereign Bonds allocation. December 2020 December 2021 December 2022 As the table below shows, the greenhouse gas Certain information ©2023 MSCI ESG Research LLC. Reproduced by permission; no further distribution. intensity of our EM Sovereign portfolio is lower than the benchmark. This book is mostly allocated to Assessing our UK Gilts exposure Emerging Markets sovereign issuers but there is currently The carbon intensity of our UK Gilts portfolio has marginally increased year on year. But this is due a percentage of the book allocated to US treasuries for to a lower GDP (denominator) rather than higher emissions. In fact, absolute emissions have fallen risk-management purposes. Our EM Benchmark is 25 year on year (from 452 to 409 million tonnes CO e, or 10 per cent). per cent in JP Morgan GBI-EM, 25 per cent in JP Morgan 2 EMBI and 50 per cent in a hypothetical cash position. We follow the PCAF (Partnership for Carbon Accounting Financials) methodology for sovereign To calculate the benchmark’s footprint, we have excluded debt for our UK Gilts’ carbon footprints, which recommends reporting of production emissions. this hypothetical cash (as mentioned earlier, pure cash is This year we revised our methodology to exclude land-use, land-use change and Forestry out-of-scope) but we appreciate that this might overstate (LULUCF), as now recommended by PCAF to avoid distorting results. Hence we have also the emissions of the benchmark relative to the portfolio. restated last year’s results. However, for the UK, this revised approach results in only a minimal change to the intensity metric. PPF EM Sovereign holdings: carbon intensity estimate PPF UK Sovereign holdings: carbon intensity estimate EM Sovereign EM Sovereign Bond Bond Portfolio Benchmark n y 250 o c Carbon intensity i en 217 r 200 (tonnes CO e per $m) 512 784 millr 208 210 2 r u c Coverage 100% 100% pe t 150 n 149 e2 a 142 144 v Note: Based on Production-based emissions (Territorial Approach) from O e C l 100 e EDGAR and GDP data from World Bank – World Development Indicators es r n i n 50 n P Certain information ©2023 MSCI ESG Research LLC. Reproduced by o T GD 0 permission; no further distribution. UK Sovereign carbon intensity UK Sovereign carbon intensity (GDP expressed in GBP) (GDP expressed in USD) December 2020 December 2021 December 2022 Certain information ©2023 MSCI ESG Research LLC. Reproduced by permission; no further distribution.