Today, the UN Pension Fund released its first report explaining how it addresses the challenges caused by climate change on its investment activities.
The publication of this report follows the recommendations made by the Task Force on Climate-Related Financial Disclosures (TCFD), designed to help companies provide better information to support informed capital allocation.
“The UNJSPF remains committed to adhere to the best practices in the pension fund industry with regard to climate action. With the TCFD report, we want to provide our stakeholders full transparency in the processes, scenarios and metrics that we implement to integrate climate-related risks and opportunities into our investment process”, stated Pedro Guazo, Representative of the Secretary-General for the investment of the UNJSPF assets.
With regard to governance, the report confirms that OIM’s climate-related decision making follows a well-structured channel of oversight. In terms of strategy, the report highlights that OIM recognizes both physical and transitional risks to the value of the assets of UNJSPF and has strategies to reduce these risks by reaching net-zero by 2050 and aligning with the IPCC 1.5°C scenario. OIM uses in-house methodologies and third parties to identify risks and uses divestment, engagement, and investment in transitioning companies to manage climate risks and take advantage of climate opportunities. OIM uses scopes 1, 2 and 3 emissions metrics to assess risks and has a target to reduce financed emissions by 40% by 2025 from 2019 levels for scopes 1 and 2.
What are Scope 1, 2 and 3 emissions?
Greenhouse gas emissions are categorized into three groups or 'Scopes' by the most widely used international accounting tool, the Greenhouse Gas (GHG) Protocol (https://ghgprotocol.org/). Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain.
The report stresses that OIM has worked with third-party data providers to use scenario analysis in disclosure of climate-related risks and opportunities.
Two scenarios were elaborated to assess the resilience of the Fund’s equity investment portfolios to a range of future possible climate-related impacts: business as usual and Paris-aligned. OIM has assessed how shifts in energy efficiency, carbon pricing, changes in taxes, subsidies and economic growth can affect global carbon emissions and temperature targets.
The report provides insight on the potential impact on the Fund’s strategic and financial position under each of the defined scenarios (BAU and Paris-aligned), and the specific impact of OIM’s commitment made in 2021 to reduce the absolute Greenhouse Gas footprint of its public markets’ portfolio (equities and corporate bonds) by 29 per cent by 31 December 2021 compared to the 2019 level. Overall, the volume of Greenhouse Gas (GHG) emission of the equities and corporate bonds portfolio has already been reduced by more than 30% since 2019.
Further, the report explains that OIM uses internal dashboards to monitor the GHG emissions of its investments and makes sure that its largest emitters are being engaged as part of its decarbonization strategy. In 2020, OIM engaged with 546 companies, with Climate change accounted for 79% of environmental engagement in 2020.
The Financial Stability Board established the Task Force on Climate-Related Financial Disclosures in 2017 to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks. The TCFD recommends documenting the processes to communicate to relevant parties the key inputs, assumptions, analytical methods, outputs, and potential management responses.
The Fund’s Office of Investment Management (OIM) has prepared its TFCD report in partnership with Entelligent, a research organization specialized in modeling climate impact of investments. Entelligent provided the climate scenario analysis underpinning the report.
The United Nations Joint Staff Pension Fund (UNJSPF) has reduced the carbon footprint of its portfolio by more than 30% below its 2019 level for equities and corporate bonds three years ahead of the schedule set by the Net-Zero Asset Owner Alliance, of which the UNJSPF is a member.
The UNJSPF provides retirement, death, disability and related benefits to over 215,000 staff, retirees and beneficiaries from the United Nations and other international member organizations. OIM is responsible for the investment management activities of the Fund, overseeing over $90 billion of assets (value in December 2021). The fiduciary duty to manage the assets of the Fund in the best long-term interest of its participants and beneficiaries encompasses a strong commitment to sustainable investing.