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    Climate reporting for pension scheme gilt portfolios

    Climate reporting for gilt portfolios

    22 July 2021 Responsible investment, Fixed income

    Mandatory reporting on climate data will apply to larger UK pension schemes from October 2021. With UK pension schemes holding large amounts of gilts, we present our initial thinking for reporting on emissions linked to gilt portfolios.

    • UK pension schemes will need to provide, 'as far as they are able', at least three emissions measures for their portfolios: an absolute emissions metric, an emissions intensity metric, and one other. We provide some possible metrics for gilts.
    • Gilts generally perform well on the emissions metrics we consider, but the measures incorporate some limitations including potential for double counting, exclusion of ‘exported’ emissions, and a limited forward-looking perspective.
    • There are several ways for pension scheme trustees to engage on climate-related issues. Insight is actively engaging on climate change matters on behalf of our clients.


    Climate reporting for UK pension scheme trustees: obligations and options

    Official guidance states that pension scheme trustees should, 'as far as they are able', provide a minimum of three measures with regard to their portfolios: an absolute emissions metric, an emissions intensity metric, and one additional climate change metric:1

    1. an absolute emissions metric – total greenhouse gas (GHG) emissions associated with the portfolio
    2. an emissions intensity metric – carbon footprint per £m invested is recommended in official guidance, but weighted average carbon intensity (WACI) is also mentioned as an additional measure
    3. one other climate change metric – one or more of the following metrics are recommended:
    • a portfolio alignment metric, which aims to consolidate carbon reduction and net zero targets of issuers in a scheme’s portfolio into a forward-looking measure of exposure to climate-related risks and opportunities
    • climate value at risk (VaR), to express the potential financial sensitivity of a portfolio to climate-related risks and opportunities
    • data quality, which aims to represent the proportions of the portfolio for which there is high quality data

    Trustees should report the metrics calculated, explain any data they have been unable to obtain, and explain their choice of other climate change metric. If they have opted for a different absolute emissions or emissions intensity metric, they must explain why.

    The guidance states that trustees should report emissions data at an asset class rather than an aggregated level.

    Carbon metrics for gilts

    In discussions with our clients and their advisers, we note that significant questions remain over how to approach reporting on climate emissions for gilts. Here we present our initial thinking to support these conversations, taking into account the recommended metrics offered in official guidance (see above).

    We note that trustees are only required to fulfil climate governance requirements “as far as they are able”2. Trustees and their advisers may therefore decide reporting on emissions in relation to their gilt portfolios may be beyond their scope, even if the regulations apply to their scheme. However, we believe there are options to consider, and here we outline data that could be used to fulfil this aspect of the requirements.

    Absolute emissions

    A possible absolute measure for emissions associated with gilts is represented on the right.3

    Emissions intensity


    Carbon footprint per £m invested

    This metric normalises emissions by total government debt.



    This normalises emissions by GDP when applied to sovereigns. As most portfolios do not hold overseas government bonds, it can be greatly simplified.

    Other climate metric


    Implied temperature rise: We believe implied temperature rise, which considers the contribution of different assets to global temperature increase, may be an appropriate forward-looking metric for a gilt portfolio.

    For sovereign debt, this measure would compare future carbon abatement commitments made towards the Paris Agreement, and how these are related to a theoretical temperature rise.

    The UK has laid out a Balanced Net Zero Pathway to limit rise in global average temperature to below 2°C; for gilts, this would then be their implied temperature rise.

    Climate value at risk: We do not believe this is appropriate for sovereigns.

    Data quality: Aims to represent proportion of portfolio for which high quality data is held.

    How gilts perform on these measures

    Absolute emissions for the UK

    UK emissions are predicted to continue to decline consistently over the next 30 years to achieve the 2050 net zero target.

    Figure 4: UK’s progress to date compares well with the G74

    WACI for gilts

    As with absolute emissions, the UK performs well when compared to other G7 countries on the WACI metric.

    Figure 5: UK WACI and G7 WACI5

    Implied temperature rise

    The UK carbon budget is set to be consistent with keeping the global temperature rise to below two degrees Celsius.

    Figure 6: UK emissions predictions to 2050 and the recommended Sixth Carbon Budget6


    As well as enabling trustees to fulfil climate reporting requirements, these metrics can help trustees to monitor how the UK government is progressing towards its 2050 net zero emissions goal.

    We note that the UK government has committed to issuing green gilts for the first time this year, with the inaugural issuance expected in August. To read our thoughts on the framework that will guide this issuance and how its proceeds our used, please read our update.

    Measurement limitations for gilts

    While the recommended metrics can successfully be applied to gilts, there are certain limitations to them.

    Risk of double counting emissions

    Due to the way in which total UK carbon emissions are recorded and released, the measure includes emissions related to corporates and households, as well as those tied to government activity. As a result, there is a large risk of double- counting. Some of the emissions attributed to gilts through the absolute and intensity-based metrics may also be included in emissions calculations for corporate debt and equity.

    Exported emissions

    The raw data does not consider ‘exported’ emissions.

    National emissions inventories only consider emissions that occur within the borders of each country, and as such the ‘carbon responsibility’ for a good that is produced in one country but exported and used in another country remains with the producer. This allows countries to outsource carbon responsibility to other jurisdictions and causes their carbon footprint to appear smaller than it would if consumption was considered rather than production.

    Many of the higher carbon emitters are large exporters of CO2-intensive goods – for instance, China, Thailand and South Africa. On the other side, many of the lower carbon emitters are large importers of CO2-intensive goods – for instance, France, Switzerland and the US.

    Some consideration of this has been made in the recommendations, with the emissions embodied in imported goods and services captured under Scope 3 emissions. These will need to be included in reports from the second year in which a scheme is subject to the regulation.

    Two-dimensional outlook

    A further limitation with the recommended metrics is that they rely on single carbon data points, thereby providing a very two-dimensional outlook. While using implied temperature rise as the third climate metric does provide some forward-looking perspective, additional components also need to be considered in order to build up a more nuanced picture.

    These include aspects such as decarbonising trends (rather than snapshots), renewable energy production, energy efficiency and climate policy. The Germanwatch Climate Change Performance Index does this, combining analysis of greenhouse gas emissions, climate policy, energy use and renewable energy to provide a more sophisticated, but less measurable, output. When used in conjunction with the recommended climate metrics it can thereby provide a deeper understanding of a country’s green credentials. 

    Next steps for pension schemes

    Pension schemes come into scope for the new regulations in three phases7. As mentioned above, trustees are required to fulfil the climate change governance requirements “as far as they are able”, in recognition of the fact that there may be costs, gaps in data, and complex analysis required.

    • If, on the first scheme year to end on or after 1 March 2020, a scheme has over £5bn in assets under management (AUM), the trustees must meet the climate governance requirements for the current scheme year from 1 October 2021 to the end of that scheme year.
    • If, on the first scheme year to end on or after March 2021, a scheme has over £1bn of AUM, the trustees must meet the climate governance requirements for the current scheme year from 1 October 2022 to the end of that scheme year.
    • From any scheme year that ends on or after 1 March 2022, if a scheme has over £1bn of AUM, the trustees must meet the climate governance requirements for the beginning of the scheme year which is 'one scheme year and a day after that scheme year end date'.

    The requirements include publishing a TCFD (Task Force on Climate-related Financial Disclosures) report including data such as that described in this article.

    How trustees can engage further on climate issues

    • Sign up to the Net Zero Asset Owners Alliance: this sets and reports on targets to reach net zero emissions by 2050
    • The Investor Agenda creates and consolidates advice on tackling climate issues and advocates for policy changes
    • Engage with the Pensions and Lifetime Savings Association on climate and other matters
    • Engage with relevant government consultations

    How Insight is engaging on your behalf

    Insight is working to help our clients fulfil these and related requirements, and engaging more widely on climate-related matters.

    • Insight is a signatory to the Net Zero Asset Managers Initiative
    • Reporting on clients’ climate risk exposures
    • Engaging with the Debt Management Office on environmental issues, including the issuance of green gilts
    • Participate in initiatives driven by CDP, IIGCC and PRI

    Click here for an overview of some of the most relevant ESG initiatives, and the acronyms that accompany them.

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