How pension plans can implement TCFD recommendations

With the task force on climate-related financial disclosures becoming increasingly common in institutional investor circles, how can Canadian pension plans start to use its guidance effectively?

During a webinar hosted by the Association of Canadian Pension Management on Tuesday, Maria Montero, climate change program head at the Canada Pension Plan Investment Board, said her organization approaches the implementation of the TCFD’s recommendations through partly through it work with the Investor Leadership Network.

The network’s members are institutional investors from around the world, including many large Canadian pension funds, such as the Alberta Investment Management Corp., the Caisse de dépôt et placement du Québec and the Ontario Teachers’ Pension Plan.

Read: Canadian DB pensions share ‘behind the scenes’ look at implementing TCFD recommendations

The network supports the broader adoption of the TCFD with the aim of speeding up the establishment of uniform and comparable climate change disclosures, said Montero.

There’s a definite urgency when it comes to implementing TCFD recommendations, said Daren Smith, president and chief investment officer of the University of Toronto Asset Management Corp., also speaking during the webinar. When forecasting how high global temperatures could rise, current policies make a range of 3.1 to 3.7 degrees Celsius, he noted, while a path to a smaller 1.5 or two degrees Celsius will require a major decrease in current carbon emissions.

The TCFD recommendations are broken down through four thematic elements: governance, strategy, risk management and metrics and targets.

For governance, the recommendations emphasize that appropriate board oversight and management support are key to properly understand and manage climate change risk and opportunity, said Montero, noting the importance of clearly assigned roles at the board, chief executive officer and senior executive management levels, as well as processes to regularly monitor and assess performance.

Two years ago, the CPPIB’s senior management identified climate change as a top issue. As a result, it put together its climate change program representing a multi-year effort across departments.

Read: UTAM joins institutional investors calling on aviation sector to address climate change

The program includes a climate change steering committee, comprised of senior management, which oversees the climate change management committee. Additionally, the pension fund’s management reports at least yearly to the board of directors on its climate change efforts, while its chief risk and investment officers report regularly to the board’s risk committee on carbon footprint metrics and scenario analysis results.

Meanwhile, the UTAM’s board of directors oversees the firm’s climate-related activities. “In particular, our board approves our responsible investment policy,” said Smith. The policy includes specifications on choosing asset managers to work with, different stipulations on environmental, social and governance issues and the firm’s new climate change targets.

“In addition, we do have an external investment committee that is made up of five investment experts in the industry. And, as part of their oversight, they do endorse our approach to implementing the carbon reduction target that we’ve announced recently.”

The UTAM also has an internal responsible investing committee, made up of Smith, the firm’s three investment heads and its chief risk and operations officers. “That group is charged with setting the overall direction of our responsible investing activities, including climate change. They would approve which organization we want to join or align with. And importantly, for a smaller organization like us — we’ve got 25 employees — we’ve embedded responsible investing and climate change within the investment team. So we don’t have a separate dedicated team of people just focused on responsible investing. We really have the key leadership team individually involved.”

That type of total integration helps the UTAM select asset managers that are fully on board with their goals, added Smith.

Read: MSCI urging investment industry to integrate ESG

It’s also key for asset owners to set a specific climate strategy, said Montero. In establishing the strategy, institutional investors should be answering why and how they’re tackling climate change. “Really think broadly . . . within your organization, how could this inform your diverse strategies, including top-down asset allocation, bottom-up ESG screening and due diligence, portfolio analysis.”

Overall, it’s important to be agile, since the strategies an investor might put in place today might not be cohesive as the landscape changes, she said. Members of the Investor Leadership Network have tended to formulate strategies along four broad categories, she added, including engagement and advocacy, climate resilience, climate mitigation and low-carbon finance.

Scenario analysis, which can be one of the hardest activities for investors to tackle, is also part of forming a strategy, said Montero. “We find the most important step is just to get started. Even a qualitative scenario analysis is a good place to start, having that what-if.”

For risk management, it’s all about asking organizations to describe their processes for identifying and assessing climate-related risks and describing how those risks are managed. “We’ve embedded risk management within our overall risk framework,” said Smith. “Ideally, one should consider climate risk as part of their overall enterprise risk management framework, so it’s integrated with all the other risks a firm considers.”

Read: Institutional investors unsatisfied with public companies’ climate disclosures: survey

Further, it’s also important to integrate climate risk into portfolio risk management where possible. “One of the things that can be done here is to try to map how climate impacts may affect [gross domestic product], inflation, interest rates and consumer debt and then try to map that back to the capital markets,” he said.

Finally, with regard to metrics and targets, there’s no one-size-fits-all method for measuring the climate risk/opportunity set within the portfolio, said Smith, but there are multiple things institutional investors can employ: they can examine whether their investments are in line with the target of keeping the world’s warming at two degrees Celsius; examine the impact of climate change on their portfolio earnings, value and funded status; and measure the carbon footprint of the portfolio.

However, it’s important to remember that the data facilitating these evaluations is evolving, said Smith. “Our view is that the data has sufficiently advanced that it is a worthwhile exercise to do this type of analysis, while recognizing that the data isn’t perfect.”

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