24 Pension Protection Fund Climate Change Report 2022/23 METRICS AND TARGETS CONTINUED Scope 3 emissions For the 昀椀rst time this year, we are reporting Scope 3 emissions, as led by PPF Scope 3 emissions – PCAF Quality Score breakdown the Climate Change (Governance and Reporting) statutory guidance for Occupational Pension Schemes from the Department for Work & Pensions 1% 4% 11% (DWP). We have opted to focus our analysis on relative-only metrics as we feel 100% 35% absolute carbon emissions might be misleading for two reasons: 昀椀rst, Scope 3 29% emissions are almost entirely estimated, plus there is considerable double- 80% 18% counting across the scopes once Scope 3 is incorporated. 67% 71% Our Scope 3 emissions are estimated, however the majority have a Quality Score 60% 64% of 2 from the PCAF – see chart right (a PCAF Score of 1 presents the lowest data uncertainty and a score of 5 the highest uncertainty). 40% Few companies are currently reporting their Scope 3 emissions and where they do, they rarely cover all Scope 3 emissions categories. MSCI provides estimated Scope 3 20% emissions as a default, which equates to a PCAF Score of 4. Where possible MSCI will use a more sophisticated model which will lead to a PCAF Score of 2. 0 Equities Credit UK Credit PPF Scope 3 emissions – 昀椀nanced carbon emissions (tCO e/$m invested) 2 PCAF Q Score 2 PCAF Q Score 4 Not Covered 600 Certain information ©2023 MSCI ESG Research LLC. Reproduced by permission; no further distribution . 500 Note: Under the Scope 3 Emissions footprint quality score set by Partnership for Carbon 400 386 Accounting Financials (PCAF) Score 1 = lowest data uncertainty and Score 5 = highest data 300 uncertainty. This quality scope is valid for data in ‘Carbon emissions – Scope 3 Intensity (t/USD 200 275 million EVIC) for footprint calculation.’ This is based on estimated Scope 3 emissions using MSCI’s 100 153 85 70 proprietary model. MSCI always defaults to a PCAF quality score of 4, although some sub-models 0 108 use more sophisticated estimation approaches. Equities Credit UK Credit Scope 3 emissions by sector Scope 3 – upstream Scope 3 – downstream Whilst results shown left aggregate Scope 3 emissions across all sectors, we recognise that a few sectors tend to be responsible for a large proportion of PPF Scope 3 emissions – 昀椀nanced carbon intensity (tCO e/$m revenues) Scope 3 emissions, particularly in relation to downstream ‘in-use’ emissions. 2 We have therefore further analysed downstream emissions at a sector level for 1,200 each of the three portfolios. 1,000 976 Key 昀椀ndings are: 800 758 600 • Equities: Energy contributes by far the most to Scope 3 downstream emissions 400 (41 per cent), followed by Industrials (25 per cent), with Materials and Consumer 200 300 300 213 332 Discretionary contributing roughly 12 per cent each 0 • Credit: Energy contributes the most to Scope 3 downstream emissions Equities Credit UK Credit Scope 3 – upstream Scope 3 – downstream (27 per cent) followed by Industrials (26 per cent) and Transportation (14 per cent) • UK Credit: Industrials contribute the most to Scope 3 downstream PPF Scope 3 emissions – weighted average carbon intensity emissions (42 per cent), followed by Utilities (27 per cent) and Transportation (14 per cent). 600 583 500 566 400 300 311 200 254 192 191 100 0 Equities Credit UK Credit Scope 3 – upstream Scope 3 – downstream Certain information ©2022 MSCI ESG Research LLC. Reproduced by permission; no further distribution.