As master trusts are in their second year of reporting within the Task Force for Climate-related Financial Disclosures (TCFD) framework, our third master trust roundtable focused on sustainability.
The discussion began by recognising that ‘we must not lose sight of key issues such as decumulation, TCFD and value for money’ and the industry needs to be ‘super focused’ on doing these well. Turning to TCFD, a comment summed up the whole exercise quite well in that ‘it’s like an iceberg – the tip of the iceberg is the reporting that we all see, but getting to this point requires a significant amount of effort to make sure schemes were doing the right thing’.
Nonetheless, it was agreed that this year’s TCFD report was easier to produce than last year’s, principally because the process was established.
‘It’s important that the industry executes the basics well before any further regulatory change to reporting requirements’, although the consensus recognised that the pace of regulation on sustainability is moving quickly and the rules will evolve.
A fine balancing act
A clear consensus was reached in that TCFD does not drive how master trusts approach sustainability – however, it actually sharpens the mind. For example, if the industry did not have TCFD, how would it construct a process around net zero and putting a framework in place to track progress? This is what TCFD has provided, creating more focus around those all-important net zero targets.
However, challenges remain. It was commented that in some circumstances, TCFD reports numbered around several hundred pages. One of the biggest concerns raised focused on the engagement with members, who would struggle to wade through many of the larger TCFD reports.
‘I don’t know if members value it to the extent we hope they do’ and when we refocus back on member outcomes, ‘the amount of effort in producing these reports is disproportionate to the value we are producing’.
Despite the nice graphics, reporting needs to be simpler – ‘five pages should be able to cover everything in sufficient detail and would likely lead to better engagement levels with members…..a detailed report can still be provided, but the initial few pages should capture all the pertinent information for the member’.
Despite all master trusts adopting the TCFD framework, differences, for example, in how factors such as carbon emission are shown remain. Some schemes include extensive data on scope 3 emissions, others less so. This makes it difficult to compare reports across peers.
Furthermore, it was recognised that the data sets used in reporting is different, driven by the different methodologies used by various ratings agencies – ‘if you are a master trust and selecting a data vendor for your sustainability reporting, you are in fact also selecting a methodology and you have to be comfortable with that methodology’. It was commented that ‘Tesla has a strong rating by some providers and a weaker rating by other providers’.
Furthermore, if a master trust is relying on data from fund managers, a consistent comparison becomes more challenging. ‘Each fund manager will be plugged into different data providers, so there will be data methodology discrepancies that will appear with this approach’. It was generally agreed, that selecting one data vendor or partner creates some consistency in the process, as long as there is comfort around the methodology being used.
‘If you want consistency, you have to create template and it requires people to be measuring everything in consistent manner’ – this led to a discussion about the merits of having all pension schemes selecting one data provider so like-for-like comparisons on sustainability can be more easily made, and then whether or not it’s a good idea for all data providers to follow the same methodology. However, it can be argued that each provider have their own research teams and proprietary models, much in the same way that active managers do. But can we get to a point where we have a narrower range of outcomes? This might be achieved with more standardisation from the International Sustainability Standards Board (ISSB).
Other challenges to consider
The recent Mansion House reforms have set clear proposed targets to encourage greater investment by pension schemes in UK companies. This includes a voluntary agreement by some of the UK’s largest DC providers to commit 5% of their default fund investments in high growth companies by 2030 – namely private assets. However, there is still a big gap in accessing good quality data on sustainability from private companies, and getting this right is crucial when investing in this sector, where governance is still improving with some companies.
Furthermore, there needs to be a more balanced view taken between short term and long term returns. Those pension schemes that have higher weightings in fossil fuel companies have reaped the benefits of higher returns, as this sector has received a boost from higher oil prices. In contrast, those pension schemes taking a longer term view, and reducing exposure to fossil fuel companies on the basis of their net zero commitments would have missed out on performance.
The roundtable reinforced again that the focus must always be on securing better member outcomes. This also means balancing out short term returns versus the risks inherent in companies from the energy transition. In other words, does taking a higher risk on sustainability warrant the potential for higher short term returns. Another factor cited was investment into windfarms – if pension schemes allocate longer term capital at the early stage of a windfarm development, during the building phase, this could drive up portfolio carbon emissions. In contrast, a scheme can invest in a windfarm already connected to the national grid, creating an immediate impact on lowering emissions. However, both routes have a positive impact on sustainability and the former solves for the longer term needs of the sector, which relies on capital from pension schemes.
Member outcomes crucial
Positively demonstrating the positive outcomes of more sustainable approaches will be key, especially as default funds are making tilts to more environmentally friendly investments. ‘The next big challenge will be producing evidence in relation to how a pension scheme has decarbonised its portfolio, and of course the performance against this backdrop’.
It’s here that pension scheme trustees are the key link. ‘However, it’s important that trustees have sufficient knowledge that they can ask and articulate the right questions of their asset managers. Trustees don’t need to be an expert, but they do need to have sufficient knowledge around the topic of ESG and climate risk'.
As mentioned in last year’s roundtable, finding a more consistent way of reporting outcomes such as value for money and exposure to climate risks needs to be put into context. Instead of making comparisons between master trusts, the focus should be on providing benchmarking across all pension pathways – for example master trusts, versus SIPPS. ‘Master trusts deliver amazing value across workplace savings, and that needs to be held up against other pension arrangements’.
Next stop is the Task Force for Nature related Financial Disclosures, but for now, the focus is on getting TCFD in the strongest shape possible. Alongside this, the roundtable agreed that more context is needed around value. It’s not about pushing costs lower and lower – it also includes member engagement and the quality of administration, and areas like this are much harder to compare – yet, they impact members.
Head of Relationship Management, CACEIS UK