31 Pension Protection Fund Climate Change Report 2022/23 METRICS AND TARGETS CONTINUED Implied Temperature Rise (ITR) For asset classes where more established alignment As already mentioned, our improvements in alignment The other forward-looking data metric we have started tracking within our Portfolio Alignment work is Implied Temperature methodologies and data are available, we have been with Paris Agreement targets have largely been driven Rise (ITR). We fully acknowledge there are complexities and assumptions within the methodologies for ITRs, however we use able to rerun our analysis at least once (for Real Estate by more companies setting science-based targets or the outputs as one signal alongside other climate considerations when evaluating our investments. The below chart shows and UK Sovereign/LDI portfolios) and twice in some commitments, as measured by the SBT initiative (SBTi). how our public markets portfolios are tracking in terms of ITRs as at December 2022. cases (Equities, Credit and UK Credit portfolios). The We see this as encouraging, although we appreciate percentage of disclosed data in our Credit and UK that setting a target is only one step in the overall Implied Temperature Rise (°C) Public Credit books has signi昀椀cantly improved over the path needed to align with Net Zero. We still need last year, which gives us greater con昀椀dence about the to see continued progress from setting targets to 3.0 reliability of future results. actually delivering on these targets if we want a ‘real- world’ decarbonisation outcome, something that we 2.5 2.7 In all portfolios apart from our LDI/UK Sovereign incorporate into our engagement strategies for pushing 2.6 portfolio, these reruns have indicated improvements the leaders as well as the laggards. 2.4 2.3 from the baseline. The Equities, Credit (both Global & 2.0 UK) and Real Estate books saw a signi昀椀cant reduction 1.9 2.0 in the ‘Not Aligned’ category and improvements in both 1.5 ‘Aligned’ and ‘Committed to Aligning/Aligning’ in the past two years. 1.0 Progress of portfolio alignment by asset class as at December 2021 and 2022 updates 0.5 31/12/2021 0 Equities Equities Credit Credit UK Credit Internally-managed Equities benchmark Benchmark Credit (inc. Strategic Cash books) 31/12/2022 ITR in degrees C PPF Public market portfolios Benchmarks Credit 31/12/2021 Certain information ©2023 MSCI ESG Research LLC. Reproduced by permission; no further distribution. (corporate, Our 2022 analysis is based on MSCI’s ITR model. We have However, we hold regular dialogue with our external active cash, EM credit) 31/12/2022 adopted this approach as this also incorporates company equity managers to understand their investment rationale targets to some degree, not just projecting out the current for investing in any non-benchmark positions. emissions of a company. Comparing this year’s MSCI ITR 31/12/2021 scores with last year’s show a 0.3°C improvement in the Our Credit benchmark is primarily exposed to developed UK Public Equity portfolio, a 0.2°C improvement in the Credit portfolio markets whereas our Credit portfolio also incorporates Credit and a 0.1°C improvement in the UK Public Credit portfolio. emerging markets corporates, which we appreciate tend to 31/12/2022 We have also provided a carve-out of our internally- be on a slower trajectory towards Net Zero – hence we would managed UK Credit and Strategic Cash holdings, which has expect the slightly higher ITR score for the portfolio. 31/12/2021 a lower temperature alignment than the externally-managed assets of 2°C ITR. LDI UK Sov 31/12/2022 Both the Equity and Credit portfolios have slightly higher ITRs than their benchmarks (2.4°C and 2.3°C respectively), which is to be expected in both situations. Our Equity 1 31/12/2021 benchmark is a climate-aware index that is fully tracked by our passive mandates. However, our active Equity Real Estate mandates have more discretion to follow their own 31/12/2022 investment strategy which can result in a higher ITR. 1 The FTSE Custom All-World Climate Minimum Variance Index. 0% 20% 40% 60% 80% 100% Net Zero Aligned Committed to Align/Aligning Not Aligned Insufficient data