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Data Poses Challenges for UK Pension Funds’ Climate Compliance

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A year after pension funds in the UK were required to begin compiling sustainability reports on their portfolios, a survey has shown that data challenges are making the task difficult.

A shortage of emissions data, inconsistencies in reporting and a reliance on estimates are making it almost impossible for funds that hold about £2.2 trillion in assets to produce accurate reports on their investments’ sustainability, according to the findings of the report by Pensions for Purpose (PFP).

The industry group’s report, based on interviews with pension funds and schemes, including those of AXA, IBM, NatWest and Royal Mail, warned that the disclosure difficulties would be amplified when the Department for Work and Pensions’ (DWP) regulation is extended.

“It’s a work in progress,” PFP project manager Karen Shackleton told ESG Insight. “And I don’t think we’re there yet.”

Funds Interviewed

Since 2021, the DWP has required pension funds to submit sustainability reports based on the disclosure framework set out by the Taskforce for Nature-related Financial Disclosures (TCFD). It states that each fund must publish its first report within seven months of the end of the scheme year that began when the regulation came into force. As that date was October 1, 2021, the first reports are beginning to see the light of day.

The funds were asked to gauge their reaction to the compliance process. Data availability and quality accounted for a large part of their disquiet. While PFP accepts that the data issues couldn’t be expected to be eliminated in the first year of the regulation, they nevertheless posed a danger of creating an erroneous “baseline” against which funds would gauge their portfolios’ climate goals and shape their investment plans.

“Funds are having to estimate a lot, which makes it difficult to make decisions because estimations are inherently flawed and data based on that going forward might be skewed,” PFP research analyst Cameron Turner told ESG Insight.

PFP’s survey was based on interviews with corporate pension funds – defined benefit and defined contribution – local government pension schemes, investment consultants and asset managers. Participants at a Pensions for Purpose Paris Alignment Forum all-stakeholder event last year were also consulted.

Data Inconsistencies

Turner said that respondents had complained that data gathered by asset managers from investee companies was often inconsistent because it had been based on different reporting methodologies. This made comparisons difficult, Turner said.

Shackleton said that investment managers bore some responsibility for the data inconsistencies, as they hadn’t always fully declared the level of disclosure by the companies within their portfolios. They were not necessarily withholding information, Shackleton said, it was was more a case that investment managers may be unaware of the portfolio’s entire performance metrics.

“Comparing companies is exactly what the pension fund wants to do,” she said. “They want to aggregate this data, to come up with a portfolio number.”

Scope 3 Disclosures

Shackleton expressed particular concern about data on private companies, which aren’t required to report sustainability metrics under the regulation. This will have a significant impact on funds’ ability to report on their portfolios’ Scope 3 emissions, which will be expected in coming years.

“There are some huge challenges ahead in terms of private markets data – getting that verified, robust and comparable across the industry,” she said. “My concern is around how we cope with the potential for double counting, when Scope 3 really does roll out. You need a rigorous process to deal with that.”

Shackleton said that PFP expected tightening regulations would help solve many of the data problems, especially when organisations like hers were pushing for better disclosures. And for all the funds’ concern about data, the survey showed overwhelming support for the process of compiling climate performance metrics.

“I think pretty much uniformly they all said that pension funds should still be doing this because if you learn in the process and, in time, we think the data will improve to the point where it can drive investment strategy,” Shackleton said.

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