Asset owners warn TCFD metrics could lead to ‘carbon washing and fiduciary breaches’

TPI shares feedback to TCFD consultation where it says metrics are too onerous on asset owners

Some of the metrics proposed in the Taskforce for Climate-related Financial Disclosures (TCFD) around asset owners’ portfolio assessments and alignments are too onerous and could lead to them breaking fiduciary duties, the Transition Pathway Initiative (TPI) has said.

In a letter responding to the TCFD Forward-Looking Financial Sector Metrics Consultation, which was outlined in two documents – Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans and the associated Measuring Portfolio Alignment: Technical Supplement – TPI said asset owners have a number of concerns after reviewing the proposed metrics.

TPI said its members agreed with many of the specific elements of the consultation such as the proposals to develop a specific list of climate metrics and targets, the emphasis on climate opportunities as well as risks, and the focus on decarbonisation strategies.

However, there are “significant gaps and technical weaknesses” in the two consultation documents, which mean that the “recommendations in the report relating to portfolio assessment and portfolio alignment are not supported by the information presented in the reports”.

The letter also noted similar concerns had been expressed by the Bank of England in its May 2021 paper: Options for greening the Bank of England’s Corporate Bond Purchase Scheme.

See also: – FCA consults on TCFD requirement amid ESG ‘data gaps’

TPI said it disagreed with the use of implied temperature rise as a metric, as calculating this is more “complex” than other methods. In addition, the implied temperature metric could create “wide misunderstanding and to drive the carbon washing of portfolios” and “undermine wider efforts to transition to a low carbon economy”.

The body pointed out asset owners would find it difficult to invest in companies in carbon-intensive industries even when they have net-zero aligned targets and respond to investor engagement.

“Given that these are the companies and assets we need to transition, such an outcome seems perverse and, presumably, not the intention of the TCFD’s proposals,” the letter said.

Furthermore, the adoption of portfolio alignment metrics will have a series of undesirable consequences for asset owners, the TPI said “potentially forcing them to breach their fiduciary duties, imposing significant additional costs on asset owners”.

The letter, signed by chairs of the Church of England Pensions Board, Brunel Pension Partnership, BT Pension Scheme management and more, continued: “We remain concerned that the TCFD’s proposals seem to have been developed without consideration of the feasibility and cost versus the benefits for pension funds or asset owners. We see the attraction of the TCFD’s proposals for fund managers looking to develop and market green products, but do not see the same benefit for asset owners that have very different duties, interests and responsibilities.”

See also: – UK pension schemes to align with TCFD this summer

TPI listed its own steps to move forward suggesting TCFD is reworded so that additional reporting requirements are introduced for asset owners only at the point when “such reporting is practical, cost-effective and generates decision-useful information”.

It also said the asset owner recommendation that currently states, “asset owners should measure and disclose the alignment of their portfolios consistent with a 2°C or lower temperature pathway (e.g., Paris-aligned), and incorporate forward-looking alignment metrics into their target-setting frameworks and management processes,” is “overly prescriptive”.

It recommended it be changed to: “As the data and tools to assess portfolio alignment are not, as yet, sufficiently developed, asset owners should plan to measure and disclose the alignment of their portfolios consistent with a 2°C or lower temperature pathway (e.g., Paris-aligned), and incorporate forward-looking alignment metrics into their target-setting frameworks and management processes. Asset owners should also report on the efforts they have taken and intend to take to produce the data and tools necessary to conduct a full portfolio alignment assessment.”

See also: – FCA’s consultation on TCFD reporting: Long-awaited details revealed

With regard to the temperature rise metric, the TPI suggested it works with TCFD to map steps that need to be taken to develop an implied temperature metric that can be used as a measure of portfolio alignment. This could involve looking at where complete data sets are available, where there are gaps and break this down by asset class.

“We trust that you will find these comments and proposals helpful. We look forward to hearing from you,” the letter concluded.

The UK government’s Department for Business, Energy & Industrial Strategy (BEIS) opened the consultation into TCFD in late March, with the view to making reporting requirements mandatory in 2022.

The consultation closed on 5 May 2021 and feedback is expected to be published later this year.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...