NOW: Pensions – Industry view


Will Martindale is head of sustainability at NOW: Pensions


AN AMBITIOUS APPROACH TO CLIMATE CHANGE TARGETS


For UK pension funds, setting targets on any issue is never easy but is fundamental in order to make a system that it is better, and fairer, for all. Setting targets on cli- mate change is no different, but it remains a key part of the investment governance process for pension funds. At NOW: Pen- sions we are proud of the steps we have taken to establish our targets on address- ing climate change and the work we are doing to stay on track to meet them. Guidance from The Pensions Regulator (TPR) on Task Force for Climate-related Financial Disclosures (TCFD) reporting states that targets should “for at least one of your metrics; reinforce risk manage- ment, be scheme-specific, and not be cho- sen arbitrarily”.


While targets are non-binding, reporting on progress towards the target is required. If you miss or replace your target, you should be held accountable.


Target setting Near-term targets typically include a per- centage emissions reduction, a target year and a base year. At NOW: Pensions we


have committed to a 50% emissions reduction by 2030 based on 2019 emis- sions, as a near-term target. To track progress on this, setting a base year is important in order to hold yourself accountable and measure progress against the wider industry. The base year for coun- tries is often when the countries’ territorial emissions peaked. In the UK, the target is to reduce emissions by 50% by 2030 and by 78% by 2035, compared to 1990 levels. For investors, the base year is typically 2019 (due to the Covid 19 pandemic, 2020 and 2021 were anomaly years). Longer-term targets can include the aim to meet the widely agreed commitment to net zero greenhouse gas emissions (not adding to the amount of greenhouse gas- es in the atmosphere) and by a pre-deter- mined time. 2050 is often used because it is consistent with the UK government’s target and the Paris Climate Agreement, internationally agreed in 2015. Having targets is important because whether we as a society contribute to warming the planet by 1.5, 2 or 3 degrees, we will get to net zero; the real question is how long it takes us to get there. The longer it takes, the warmer the planet, and the higher the severity and frequency of weather-related events. Targets may cover scopes 1, 2 and 3, which refer to the three categories of emissions: Scope 1 – The greenhouse gas emissions a company makes directly through burn- ing fossil fuels Scope 2 – The emissions a business makes indirectly through using energy Scope 3 – A combination of all emissions that an organisation can indirectly be responsible for across the value chain


While many pension funds continue to raise challenges around Scope 3, at NOW: Pensions we have decided to disclose our Scope 3 emissions data. Currently, our targets refer to scopes 1 and 2.


Investment and engagement In our 2022 TCFD report, we committed to resist pressure to modify portfolios to meet headline portfolio-level decarbonisa- tion targets at the expense of incentivis- ing the real-world transition that is need- ed. Our goal is net zero greenhouse gas emissions globally – and we are seeking to maximise our influence to achieve this. Theoretically, pension funds could decar- bonise their portfolio almost immediately by selling their investments in high-car- bon economies, such as emerging mar- kets, or high-carbon sectors, which range from energy, utilities to mining, manufac- turing and transport.


Indeed, emerging markets tend to have higher carbon footprints, in part because they produce carbon-intensive goods con- sumed by developed markets. They need capital to transition their economies. However, rather than withdrawing from these holdings we, and many of our peers, use stewardship. We engage with compa- nies and, through our third-party manag- ers, vote at companies’ AGMs, to encour- age them (or if necessary, require them) to decarbonise more quickly. Successful stewardship should include escalation (some companies may disagree with us). And so, we exclude some pollut- ing companies, especially where there is little evidence that they will successfully transition, but our preference is, particu- larly in the first instance, engagement.


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ISSN: 2045-3833 Issue 125 | July-August 2023 | portfolio institutional | 11


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