39 Pension Protection Fund Climate Change Report 2022/23 APPENDICES CONTINUED Appendix D Carbon metric equations Our carbon footprint calculations Total Financed Carbon Emissions in tonnes CO e: 2 current value of investment in entity X entity’s GHG emissions We report a range of carbon Relative carbon intensity ( Entity’s Enterprise Value including cash ) emissions-based metrics for our listed To give the fullest picture of the carbon global equity and credit investment intensity of our portfolio and so we holdings to align with both TCFD and can compare di昀昀erent portfolios on as Financed Carbon Emissions per million dollars invested Partnership for Carbon Accounting close to a like-for-like basis as we can, Financials (PCAF) guidance. We are we use three key measures: metric (may be shown in other currencies too): also guided by the DWP’s work around current value of investment in entity proposed metrics for pension funds. • Financed carbon emissions per X entity’s GHG emissions million dollars invested metric ( Entity’s Enterprise Value including cash ) Although our year-end is 31 March, we Measuring the Financed Carbon review our climate exposure metrics Emissions per million dollars to 31 December. This allows for the invested helps us understand the current portfolio value ($m) greatest coverage of climate data, carbon emissions being 昀椀nanced by such as the annual corporate CDP the size of our investment portfolio. Financed Carbon Intensity per million dollars revenue responses made available to investors • Financed carbon emissions per each autumn. million dollars revenue metric metric (may be shown in other currencies too): Our preferred metric for assessing Measuring the Financed Carbon current value of investment in entity carbon risk exposure on a day-to-day Intensity per million dollars of ( Entity’s Enterprise Value including cash X entity’s GHG emissions ) basis is the Weighted Average Carbon revenue helps us understand the Intensity (WACI). We feel it gives us carbon e昀케ciency of our portfolio, the greatest coverage in 昀椀xed income i.e., how e昀케cient the companies where we have more signi昀椀cant are at generating output per tonne current value of investment in entity X entity’s revenue exposure and allows us to compare of carbon. ( Entity’s Enterprise Value including cash ) similar types of assets and portfolios, • Weighted Average Carbon regardless of investment size. Intensity (WACI) metric Weighted Average Carbon Intensity Absolute 昀椀nanced emissions As recommended by the TCFD, we use the WACI footprint to monitor metric (where normalisation factor is entity’s revenues, but other normalisation factors can be used): For absolute carbon emissions, our portfolios’ exposure to carbon- we measure the total operational intensive companies. It’s 昀氀exible current value of investment in entity entity’s GHG emissions Scope 1 and Scope 2 carbon enough to use across asset classes ( current portfolio value X normalisation factor ) emissions (based on the de昀椀nition and gives us greater coverage in set by the Greenhouse Gas (GHG) 昀椀xed income portfolios. Protocol) using data from MSCI ESG Weighted Average Carbon Intensity for EM Sovereign Research. To calculate our apportioned Constituents (tonnes CO e/ $M GDP nominal) ‘ownership’ of each investment, we’ve 2 used Enterprise Value Including Cash Measures a portfolio’s exposure to carbon-intensive economies, de昀椀ned as the portfolio weighted (EVIC) as recommended by the PCAF. average of sovereigns’ GHG Intensity (emissions/GDP). Sovereign constituents tonnes CO e/$m GDP nominal 2 current value of investment sovereign issuer’s GHG emissions i X i ( current portfolio value sovereign issuer’s $M GDP ) i Weighted Average Carbon Intensity for UK Sovereign Constituents (tons CO e/ PPP-Adjusted GDP): Measures 2 a portfolio’s exposure to the UK economy, de昀椀ned as the portfolio weighted average of sovereigns’ GHG Intensity (emissions/GDP). We have calculated this metric based on PCAF’s latest recommendations. Sources: Sovereign GHG without LULUCF from United Nations Framework Convention on Climate Change (UNFCCC) and PPP-Adjusted GDP from World Bank. Sovereign Emission Intensity Formula based on PCAF standard (see page 116 of https://carbonaccounting昀椀nancials.com/昀椀les/downloads/PCAF-Global-GHG-Standard.pdf): Sovereign GHG without LULUCF / PPP adjusted GDP.