‘The combination of forward-looking climate disclosure, net zero plans, and portfolio alignment metrics will pull forward investment, especially if there are credible and predictable climate policies from governments, like carbon pricing.’ - Mark Carney, former governor of the Bank of Canada, former governor of the Bank of England, and UN special envoy for climate action and finance, September 2021 1.

In September 2021, the 10 largest pension funds in Canada received letters from their beneficiaries with a request for bigger transparency and a plan to meet legal obligations regarding climate risk management 2. However, transparency is not enough for the future. If Canadian pension funds want to join the global investment community that strives to reach Net Zero by 2050, they have to ensure that their portfolio emits between 7 – 10% less emissions each year from now until 2050. This is a big job, but a doable one. Here are five thoughts to help them on their way:

1. Choose the right metrics

Carbon foot printing may be an established way to measure your portfolio’s carbon emissions. The drawback is that it looks backwards – at emissions already emitted. This may not be helpful to identify opportunities, which is why it is time to switch it up. A ‘temperature alignment score’ measures the level of warming in terms of degrees centigrade the portfolio is aligned with, as the Paris Agreement does so for the planet. It is based on forward-looking emissions reduction goals set by companies. The methodology determines if these goals are ambitious enough for a Net Zero trajectory. For example, if a pension fund only invests in companies with carbon reduction goals that meet a Net Zero trajectory, then the whole portfolio would be in line with Net Zero as well.

2. Set up your tooling

Once you have the data, it is time to run the analytics such as to calculate your portfolios implied temperature rise (ITR) score. There are open source options (e.g. The Science Based Targets Initiative Finance Tool) to get you started, which covers listed equity and debt. Our Climate ALIGN solution has expanded on this open source tool and added additional asset classes including sovereign debt, real estate, and -coming soon- private assets. Conveniently, we can even run the whole analysis for you.

3. Act

Rethink and adjust with the board and the portfolio managers your company, sector, benchmark and even asset class exposures. Where can you maximize ‘alignment gain’ and ensure that you are investing in future-proof assets? We are happy to support you in making the right choices.

4. Understand your risk

A net zero portfolio may still have significant (climate) risk. Risks like extreme weather events, high volatility, and concentration risk remain as relevant as ever.

5. Disclose

Where better to disclose your ambitions and progress than in your own Task Force on Climate-related Financial Disclosures (TCFD) report. Unsure of where to start? We have some of the most experienced TCFD report writers on our team to lend a hand.

 

Is your pension fund confronted with challenges like low yields, complex liabilities, increasing investment performance analysis demands, or in search of assessing climate change related risks and opportunities? Learn more about our solutions for Defined Benefit (DB) and Defined Contribution (DC) pension funds.

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[1] https://www.imf.org/external/pubs/ft/fandd/2021/09/mark-carney-net-zero-climate-change.htm
[2] https://www.shiftaction.ca/news/2021/9/29/beneficiaries-warn-canadas-largest-pensions-of-legal-duty-to-manage-climate-related-financial-risks

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