UTC (UK) Pension Scheme
Report prepared in line with the recommendations of the Taskforce on Climate-related Financial Disclosures
Introduction
This statement describes the approach taken by the UTC (UK) Pension Scheme (‘the Scheme’) with regard to climate-related risk. It is intended to be consistent with:
(i) relevant legislation (as an occupational defined benefit pension scheme with relevant assets under management); (ii) the format of reporting proposed by the Taskforce on Climate-related Financial Disclosures (‘ TCFD ’) .
The Trustee’s investment and actuarial advisers (Barnett Waddingham) have assisted in the production of this report. It covers the Scheme’s arrangements in respect of the following four areas:
• Governance – the Scheme’s governance arrangements around climate -related risks and opportunities • Strategy – the potential impact of climate-related risks and opportunities on the Scheme’s strategy and financial planning • Risk management – the processes used by the organisation to identify, assess and manage climate-related risks • Metrics and targets – the metrics and targets used to assess and manage relevant climate-change related risks and opportunities It is important to recognise that climate science is evolving and disclosures relating to climate change remain in their early stages. In particular, the quality and reliability of data on carbon emissions and scenario analysis remain works in progress. With this in mind, the Trustee continues to challenge their advisers and asset managers on these specific points and expects these disclosures to develop and improve over time. Due to such challenges around obtaining reliable data on carbon emissions, this disclosure focuses on the assets of the Scheme where better quality data is available and material climate-related risks can therefore potentially be managed. These assets are also expected to include the majority of the Scheme’s potential exposure to fossil fuel companies and other heavy emitting sectors.
The disclosure covers:
Listed equities
•
Target return funds
•
Corporate bonds (public markets)
•
The assets excluded from reporting this year are the Scheme’s Liability Driven Investment portfolio , its secure income holdings and asset-backed contribution arrangements. These assets have not been included due to practical issues around the determination of relevant data, as well as the lack of ability of the Trustee to manage climate-related risk in respect of some of these assets. The Trustee will continue to review whether data in respect of these assets should be published in future reporting.
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Governance
Documentation of the Trustee’s policies and their implementation
The Trustee maintains a Statement of Investment Principles (‘SIP’), which sets out the Scheme’s policies on financial risks, including climate change and responsible ownership. The Trustee manages climate risk according to financial materiality in the context of the Scheme ’s expected lifetime and also against the other risks and opportunities with which it is presented.
The Trustee also publishes an annual Implementation Statement used to review its approach to responsible ownership and engagement with investee companies.
As part of the process of preparing the Implementation Statement, the Trustee considers the Scheme’s asset managers’ approaches to stewardship, including data on voting and engagement, as well as engagement case studies over a 12-month period. In particular, the statement includes examples of significant votes and engagements related to climate issues over the reporting period.
Delegation
The management of climate- related risk with respect to specific securities is delegated to the Scheme’s investment managers, who are all third-party firms independent of the Trustee and its sponsoring employers.
Monitoring the Scheme’s investment managers and consultant
The Investment Sub- Committee (‘ISC’) of the Trustee meets at least quarterly and receives performance monitoring reports from its investment consultant that include ratings providing a view on the ability of the Scheme’s investment managers to integrate climate risk management and other factors associated with environmental, social or governance (‘ESG’) issues into i nvestment processes.
The ratings also consider how active ownership activities undertaken by asset managers, including voting and engagement on climate-related issues, are used as part of investment processes.
In monitoring the Scheme’s managers, t he ISC takes account of the fact that ESG issues are more relevant for some parts of the portfolio. For example, ESG considerations do not currently play a significant role in the selection of gilts within the LDI portfolio but may have a greater influence on the selection of equities within actively managed target return holdings. On an annual basis, the ISC also evaluates the performance of its appointed investment consultant in line with agreed objectives. The ISC is comfortable with t he consultant’ s ability to advise on climate- related risks and opportunities, having considered the approach the consultant takes to determine ESG ratings for the investment managers, as well as knowing that the consultant is a signatory to the UNPRI and the UK Stewardship Code.
Training
The ISC maintains a training log and receives training on sustainable investment issues, including climate change, as required. The ISC decides on training topics through regular discussions of its training needs. Such topics are discussed within a stand-alone agenda item at meetings. Over 2023, training included specific sustainability items on meeting agendas and presentations from a number of the Scheme’s asset managers, including updates on how sustainability matters were incorporated into their strategies. Such sessions allow for an opportunity for the ISC to question and challenge its consultants and asset managers on sustainability matters.
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Reporting on carbon exposure and climate-related risks
The Trustee has now published two annual TCFD reports (including this document) and, to support these, the ISC has commissioned reports on carbon exposure analysis and scenario testing of the resilience of the investment strategy in different future climate and policy response scenarios. In preparing this year’s report, t he Trustee collected and analysed updated emissions data and previous carbon exposure analysis (to consider the year-on-year change in the data). This Trustee also considered scenario testing undertaken previously, including the need to refresh it. The Trustee, via the ISC and its advisers, reviews its strategy and engages with its investment managers based on the key findings from such analysis, as necessary.
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Strategy
Climate-related risks and opportunities over the short, medium and long term The Trustee believes that sustainability issues, in particular climate change, present risks and opportunities that increasingly require explicit consideration and may materially affect the future financial performance of the Scheme’s investments.
The Trustee has considered the following short, medium and long term drivers of risk.
Short term (less than 10 years)
• Momentum-driven changes in markets as investor awareness changes, e.g. because of concerns about specific stocks that might be vulnerable to the transition to a lower carbon economy. • Market pricing changes caused by the likelihood of different climate scenarios emerging, e.g. if a higher warming scenario becomes more likely because of a failure of governments to agree necessary action to limit warming to 1.5°C-2.0°C. • Unexpected regulatory changes that cause rapid price movements, e.g. the introduction of high rates of carbon taxation. • Risks associated with the transition to a low carbon economy are likely to become increasingly important over the medium term. • Such risks/opportunities include development of new technologies, obsolescence of existing industries, and development of policy and regulation. • Over the longer term the ‘in practice’ risks associated with climate change will come to the fore. • Such risks would include the potential physical impact of climate change, such as flooding, desertification, changes in weather patterns, change in migration patterns and conflict over natural resources.
Medium term (10 to 20 years)
Long term (beyond 20 years)
The above timeframes should be set against the future lifetime of the Scheme which is expected to pay benefits for many decades into the future.
Strategic actions undertaken to manage climate-related risks The Trustee has commenced a process to gain a better understanding of the Scheme’s climate -related risks and exposures and will review approaches to manage climate-related risks and opportunities in its investment strategy over the next 2-3 years. ESG and climate considerations were considered as part of the Scheme’s recent investment in secure income assets. Climate change scenario analysis During 2022 , the Trustee commissioned a strategic climate change scenario analysis on the Scheme’s target asset allocation, to assess the potential implications of different climate change scenarios and policy responses to these. The scenarios used by the Trustee when undertaking scenario analysis can be found in the appendix to this report. The scenarios were chosen to illustrate a range of different outcomes with varying levels of physical and transitional risk. These included:
A measured orderly transition (“early action”)
•
• Sudden disorderly transitions ( “ late action ” and “far too little too late” ) • “ Hot house worlds ” (“no additional action” and “ far too little too late ” )
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Key finding from the analysis were as follows:
(i) The Scheme’s funding position demonstrated a good amount of r esilience with respect to the potential impact of climate change, based on the modelled impact on expected returns under a 1.5°C-2.0°C warming scenario.
(ii) The u ncertainty in the impact on the Scheme’s funding position is higher for scenarios under which increased levels of warming are assumed.
(iii) The Scheme’s funding level is expected to be negatively impacted (relative to a scenario whereby climate action is taken early) over all adverse climate warming scenarios considered. However, the level of impact varies across scenarios and time periods: - Over the short-term , the potential impact on funding is most influenced by the impact on asset returns under scenarios where limited or no immediate action is taken to address climate change, so that future risks become priced into current market values more quickly. - Over the medium-term , the potential impact on funding is more heavily influenced by scenarios where policy action is taken by governments at a later stage, leading to greater disruption to companies and other institutions that issue investments. However, these impacts are expected to be somewhat recovered over time, as a result of policies reducing longer-term global warming.
- Over the long-term , the funding level impact is mostly impacted under scenarios where little policy action is taken, driven by emerging physical impacts of climate change.
An illustration of the potential impact, in terms of lost investment returns (relative to a scenario where climate change is less severe as a result of early policy intervention), is provided via the table and key below – a higher score implies a greater impact on returns.
The Scheme is invested in a relatively low-risk investment strategy with a material allocation to fixed income assets. Although such assets have exposure to climate risks, they are expected to be less impacted than assets such as equities or commercial property. Consequently, the Scheme’s climate risk impact scores are relatively moderate. Based on projections of the Scheme’s funding position under different climate warming scenarios, the current investment strategy is expected to provide a good amount of resilience over the medium to long term.
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The Trustee has decided not to undertake new scenario analysis for this year’s report and have relied on the results of the analysis undertaken in 2022. There have been no material changes to the investment approaches used since the previous analysis was undertaken, and any strategic changes have been towards a lower risk approach (including lower expected climate risk). Therefore, the Trustee has taken the view that the analysis previously undertaken remains relevant and suitable for the purposes of this y ear’s report. The Trustee receives additional advice from covenant and actuarial advisers on the resilience of the Scheme’s funding plan, taking account of the financial strength, operating markets and business plans of its sponsoring employers and group parent. The Trustee is comfortable that the funding and investment strategy is suitably resilient against a range of risks. The Trustee will review the resilience of its funding and investment strategies relative to climate risk using an updated scenario analysis exercise in 2025.
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Risk management
Processes for identifying and assessing climate-related risks The Trustee seeks to identify and assess climate-related risks through a combination of:
• Top-down strategic analysis, e.g. through scenario testing across various scenarios that consider both transition and physical risk • Annual monitoring of carbon exposure metrics • Bottom-up analysis of climate- related risk undertaken by the Scheme’s investment managers on behalf of the Trustee • Advice from covenant and actuarial advisers on the resilience of the Scheme’s funding plan, taking account of the financial strength, operating markets and business plans of its sponsoring employers and group parent Processes for managing climate-related risks The Trustee manages risk according to financial materiality in the context of the Scheme’s expected lifetime and plans to bring it into a position where it has a low-risk funding and investment strategy over the short to medium term. The Trustee’s approach to climate -related risk management is guided by strategic analysis, assessment and monitoring of carbon metrics, and the perceived ability of the investment managers to incorporate ESG-related risk management into their investment processes, inclusive of their stewardship and engagement approach on climate issues.
The Trustee’s policy for managing the broader range of risks is discussed in the SIP.
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Metrics and targets
Key metrics for climate-related risks For listed equities, target return funds and corporate bonds, the Trustee uses the following key metrics:
Total carbon emissions*
• The estimated total annual greenhouse gas/carbon emissions associated with the Scheme’s assets • Expressed in tonnes of carbon dioxide (tCO 2 )
Carbon footprint
• The carbon emissions per £1 million invested
Paris alignment
• The ultimate aim for a Paris aligned investment is a goal of no more than 2.0°C global warming from pre-industrial levels • Data expressed as percentage of holdings with approved science-based emission reduction targets • Percentage of holdings with carbon emission data available • Scope 1 emissions are the direct emissions by a company or other entity • Scope 2 emissions result from the energy used by a company or other entity • Scope 3 emissions are indirect and produced by suppliers to an entity or the user s of an entity’s products .
Data coverage
The measurement of Scope 3 data is less accurate than for Scope 1 and 2, and lends itself to a significant proportion of estimated data.
*All of the Scheme’s investment managers calculate carbon emissions in line with the Kyoto protocol. The Trustee has used the DWP guidance when choosing their approach to calculating metrics.
The Trustee’s ability to determine appropriate and reliable climate-related risk metrics is limited by the availability of consistent and comparable data. Market practice, tools and data are being improved to obtain a better understanding of climate-related risks across different asset classes.
Where possible, t he Trustee has incorporated Scope 3 emissions into this year’s metrics. The Trustee will review the suitability of other metrics on an ongoing basis.
Summary of metrics for the Scheme The key metrics for the Scheme’s equity, target return and corporate bond holdings are summarised in the table below:
Total emissions (Scopes 1 & 2) (tCO 2 )
Data coverage (Scopes 1 & 2) (%)
Total emissions (Scope 3) (tCO 2 )
Data coverage (Scope 3) (%)
Asset class (allocation at effective date %)
Footprint (Scopes 1 & 2) (tCO 2 /£1m)
Footprint (Scope 3) (tCO 2 /£1m)
Alignment (%)
Equities (9%)
113,174
874
95
13,554
105
52
95
Target return (5%)
16,417
421
91
5,944
84
20
82
Corporate bonds (33%)
147,387
301
87
18,035
37
45
87
Total/aggregate
276,978
453
89
37,533
55
43
88
Source: investment managers. Data as at 31 December 2023. Arrows depict change from last year, where previous data is available. The data provided by the investment managers and its interpretation are still developing and, consequently, it should not be assumed that the data used to calculate the metrics are consistent year-on-year. For those who could provide this information, the Scheme’s managers have used a degree of estimated data when calculating their carbon emission data. Due to data availability, the amount of data estimated for Scope 3 data (where provided) is significantly larger across all three asset classes versus Scopes 1 and 2 data.
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Over the 12- month period, the Scheme’s total Scope 1 and 2 carbon emissions and footprint have fallen. There were several reasons behind this change including:
• Changes to the strategic asset allocation made by the Trustee • A general fall in global emissions for developed and emerging market equity indices, to which the Sch eme’s equity and target return portfolios are exposed The overall decline in carbon emissions and footprint was dampened to an extent by the rise in reported emissions from the Scheme’s corporate bond portfolio, which resulted from an increase in the data coverage provided. The Trustee has incorporated Scope 3 emissions into the metrics this year and will continue to do so in future reports. The Trustee was unable to obtain data for one of the Scheme’s funds within the Target Return portfolio. The Trustee, via its investment consultant, has engaged with the manager regarding future availability of Scope 3 data.
Data coverage targets for Scopes 1 and 2 are commented on further in the next section.
There was also an overall improvement in investee companies using science-based emission reduction targets – this is the ‘Alignment’ column in the table. This was due to a general increase in companies that have adopted such targets in recent years. Target used to manage climate-related risks and opportunities The Trustee’s initial target is to work with its investment managers to improve data coverage for Scope 1 and 2 emissions to 90% within the first three years of reporting, i.e. by 31 December 2025, with a view to setting emission reduction targets once that point has been reached.
Over the period, the data coverage on Scope 1 and 2 emissions improved to 88% (as per the above table and methodology) , and towards the Trustee’s overall target of 90%.
There has been an improvement in data quality across all funds on which the Scheme reports. However, the Trustee is mindful that a proportion of the data is estimated and will continue to engage with all managers regarding data coverage and quality, via its investment consultant.
Approved by UTC Pension Trust Ltd on 8 May 2024
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Appendix 1 – Climate scenarios
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