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TCFD governance and reporting – metrics and targets

This article is part of a series on new duties for UK pension scheme trustees to assess, manage and report on climate change risk. To read the rest of the series click here.

A note on timing

These requirements apply to trustees of the UK’s largest occupational pension schemes (with more than £5 billion in assets) and master trusts from 1 October 2021; other schemes with more than £1 billion in assets will fall within scope a year later.

Specific valuation and timing rules apply to determine whether/when a scheme will be in scope of these requirements. Please contact an Allen & Overy adviser if you need more information on this.


Trustees of UK pension schemes routinely monitor investment performance against selected benchmarks, so the concept of selecting metrics and targets in relation to climate risk feels relatively familiar. However, the government has acknowledged that, due to the pace of change and the varying speeds at which new requirements are being implemented across the UK economy, data availability and consistency of measurement makes compliance with the new TCFD requirements more difficult.

The focus for UK pension schemes is on making a start, rather than waiting for perfect data, and then improving over time as other pieces fall into place. Here we look at the duties that trustees will need to comply with in relation to choosing, monitoring and reporting on climate change-related metrics and targets.

What are the new duties in relation to metrics and targets?

The use of metrics and targets is intended to provide quantitative information to help trustees identify, manage and track the scheme’s exposure to climate change-related risks and opportunities. Trustees must:

  • select at least three metrics to calculate in relation to the scheme’s assets, comprising total greenhouse gas emissions attributable to the scheme’s assets, emissions intensity (carbon footprint) and one other;
  • obtain data (as far as they are able) in each scheme year and calculate selected metrics, using this information to identify and assess the climate-related risks and opportunities relevant to the scheme; and
  • set a target for one of these metrics and annually measure the scheme’s performance against that target, as far as they are able; and taking into account that performance, determine whether the target should be retained or replaced with a new one.

The selected metrics must be reviewed (and where appropriate replaced) from time to time, as appropriate to the scheme. As with scenario analysis, ‘as far as the trustees are able’ means taking all such steps as are reasonable and proportionate in the particular circumstances, taking into account financial and time costs. Trustees should not spend a disproportionate amount of time on non-material data gaps, for example, but should prioritise any persistent data gaps that are likely to make a material difference to the level of climate risk.

Understanding the new duties

Metrics should be calculated and reported using a similar approach as for scenario analysis – that is, 

  • in a multi-section DB scheme, at the level of each DB section (but sections with similar asset, liability and funding characteristics may be grouped together);
  • for DC schemes: at the level of each ‘popular arrangement’ offered by the scheme. This means any arrangement in which £100m or more of the scheme’s assets are invested, or which accounts for 10% or more of the assets used to provide DC benefits (excluding assets that are solely attributable to additional voluntary contributions).

However, there is some flexibility here: if trustees believe it is not meaningful to aggregate data across particular asset classes in a particular section or arrangement, they should not do so. Different metrics may be selected for different parts of the portfolio (for example, different asset classes or different sections of the scheme). In addition, trustees are free to measure and report on performance against targets in whatever way they consider appropriate.

The data obtained should (as far as the trustees are able) include scope 1, scope 2 and scope 3 greenhouse gas emissions data (that is – direct emissions by an entity, indirect emissions from energy used during the entity’s activities, and all other indirect emissions from the activities of the entity), with the exception that in the first year in which the requirements apply to a scheme, trustees are not required to obtain scope 3 data. The statutory guidance makes clear that this requirement relates to ‘the pension scheme’s financed emissions’ (investment emissions). It does not relate to, for example, the energy used in heating or lighting the scheme’s offices, or the scope 3 emissions of third parties assisting with governance activities. The guidance sets out more detail in relation to various types of asset and expected metrics, together with guiding principles: for example, the methods of measurement should be internally consistent and the objective is to provide meaningful information.

Targets should be scheme-specific and should not conflict with the scheme’s Statement of Investment Principles. They are not binding and do not restrict trustees’ investment decision-making. There is considerable flexibility around target-setting – it can be portfolio-wide or could relate to a particular sector or fund, but the guidance is clear that the target (or an interim target) set should be not more than ten years into the future, in order to help trustees consider and manage risk.

Getting started

The government’s focus in this area is on schemes getting started, even though there may be challenges with data availability. The flow of data will gradually increase as the result of new FCA rules for premium UK listed companies, TCFD-aligned rules that will follow in 2022 for asset managers, and ongoing regulatory alignment throughout the investment chain. In the meantime, where data is incomplete, trustees may need to use modelling or estimation to fill gaps, or use qualitative instead of quantitative approaches for particular asset classes (for example, the guidance states that trustees are not expected to be able to readily calculate emissions associated with derivatives at present). Where this is the case, a concise explanation should be given of the issue and impact, in the scheme’s TCFD report.

The Pensions Climate Risk Industry Group has published guidance on ‘Aligning your Pension Scheme with the TCFD Recommendations’ (this is due to be updated). The guidance includes a useful overview of different emissions and other metrics and considerations relevant to choosing between them; examples of targets at different levels of sophistication; and a case study and example metrics report.

Further resources: