13 Pension Protection Fund Climate Change Report 2022/23 STRATEGY AND RISK MANAGEMENT CONTINUED CASE STUDY Progressing our Work continued throughout this year to refresh our assessments in the Equity, Credit and Real Estate asset Paris Portfolio Alignment Project classes that saw turnover or allocation changes. We can now track how our portfolio alignment has progressed across a number of time periods, and we have already seen Last year we reported on our innovative project to assess the implied good progress. For example, we have seen the percentage temperature rise (ITR) of our portfolio relative to the goals of the 2015 PPF Fund Paris Alignment of the Fund categorised as ‘Not Aligned’ decline by 11 per cent while the percentage classi昀椀ed as ‘Aligned’ increased Paris Agreement. Subsequent analysis has helped us become better +7% -11% by 7 per cent between December 2020 and 2022. informed about our position and how di昀昀erent parts of our portfolio The main driver for the declining allocation to ‘Not Aligned’ might be contributing to climate change. Dec-22 is down to the exponential success of the Science-Based Targets initiative (SBTi), which has nudged many companies up to the ‘Committed to Align’ bucket. In 2020, there were Initiated in early 2021, the Paris Portfolio Alignment ITR for PPF portfolio 2020–2022 918 companies signed up to the SBTi, of which 495 had Project aims to help us: Dec-21 approved targets. By May 2023, this had grown to 5,309 companies. See more in Metrics and Targets. • Understand where – if business were to continue 2.6 as usual – our investment portfolio stands from a 2.5 -8% Strengthening our decarbonisation approach bottom-up perspective in terms of alignment with the 2.4 Dec-20 The Paris Portfolio Alignment Project has enabled us to set Paris Agreement 2.3 a more con昀椀dent direction for decarbonising our portfolio • Develop methodologies for 昀椀lling gaps in asset classes than if we had only set a top-down target – for example – especially among private companies – and try-and- 2.2 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% feeding into the creation of our Climate Watchlist (see test the emerging methodologies 2.1 Net Zero Aligned page 16). It has also allowed us to contribute directly to 2.0 advancing the measurement and management of climate • Assess ITR contributions by all asset classes in order to Committed to Align/Aligning Not Aligned risk using a Paris alignment lens, and identi昀椀ed where identify speci昀椀c companies/assets that are misaligned 1.9 Insufficient data Not included we and our peers need to push for improvements in • Develop engagement strategies for the largest 1.8 alignment data and reporting. contributors to climate change to improve their 1.7 alignment, or consider escalation options, while still How we have categorised our alignment assessments: focusing on meeting our investment objectives. 1.6 Net Zero: Assets already achieving net zero emissions Next steps 1.5 Aligned: Assets with ITR score of 1.5°C or lower; Progress on the PPF ITR score Dec-20 Dec-21 Dec-22 assets with carbon performance aligned with their Each desk within our Investment team has We reported the high-level ITR 昀椀ndings of the 2020 sector Net Zero pathway designated areas of focus for the next year to drive baseline assessment in our 2021/22 report, which showed Categorising assets by alignment further improvement in alignment with the goals of the Fund was on a 2.5°C global warming trajectory. The ITR score is useful in allowing us to aggregate the Committed to align/aligning: Assets with ITR score the Paris Agreement. In summary: di昀昀erent asset classes to give an overall Fund assessment, between 1.5 and 2°C; companies with approved Our December 2022 update indicates the Fund’s ITR but it is more limited in understanding the progress of SBTi target or target set; countries with a Net Zero • For Liquids Markets where data availability score has reduced to 2.3°C (see chart), driven largely alignment. Therefore, we have spent a lot of time further commitment or NDCs ‘almost su昀케cient’ and coverage of ITR/SBTi is greater, action is by improvements in our Equities, Corporate Credit classifying the portfolio (by asset class) into alignment Not aligned: Assets with ITR score over 2°C and no centred around our new Climate Watchlist of and Real Estate books. categories, informed largely by the IIGCC’s Net Zero SBTi target companies requiring targeted engagement on Investment Framework. Insu昀케cient data: Assets that we are unable to model climate transition Not included: Assets or asset classes considered • For Private Markets, the alignment project out-of-scope for the project has emphasised the need for portfolio company disclosure so we can start validating Note: The PPF ESG team’s in-house assessments based on Ortec proxies and replace them with real data. See 2020 and 2021 results, MSCI ITR 2022 analysis, SBTi approved more about how we are progressing this on targets and countries’ targets. Alignment categories are leveraged page 18. from the IIGCC Net Zero Investment Framework.